UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                        to                       

Commission File Number: 001-33801

 

APPROACH RESOURCES INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

51-0424817

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

One Ridgmar Centre

6500 West Freeway, Suite 800

Fort Worth, Texas

 

 

76116

(Address of principal executive offices)

(Zip Code)

(817) 989-9000

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes       No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)       Yes       No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes       No

The number of shares of the registrant’s common stock, $0.01 par value, outstanding as of April 30, 2018, was 94,627,262.

 

 

 


PART I―FINANCI AL INFORMATION

Item 1. Financial Statements.

Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Balance Sheets

(In thousands, except shares and per-share amounts) 

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

22

 

 

$

21

 

Accounts receivable:

 

 

 

 

 

 

 

 

Joint interest owners

 

 

193

 

 

 

117

 

Oil, NGLs and gas sales

 

 

9,521

 

 

 

9,678

 

Derivative instruments

 

 

1,250

 

 

 

1,398

 

Prepaid expenses and other current assets

 

 

1,558

 

 

 

5,486

 

Total current assets

 

 

12,544

 

 

 

16,700

 

 

 

 

 

 

 

 

 

 

PROPERTIES AND EQUIPMENT:

 

 

 

 

 

 

 

 

Oil and gas properties, at cost, using the successful efforts method of accounting

 

 

1,944,388

 

 

 

1,930,577

 

Furniture, fixtures and equipment

 

 

5,689

 

 

 

5,658

 

Total oil and gas properties and equipment

 

 

1,950,077

 

 

 

1,936,235

 

Less accumulated depletion, depreciation and amortization

 

 

(868,923

)

 

 

(853,359

)

Net oil and gas properties and equipment

 

 

1,081,154

 

 

 

1,082,876

 

Total assets

 

$

1,093,698

 

 

$

1,099,576

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,028

 

 

$

9,450

 

Oil, NGLs and gas sales payable

 

 

5,438

 

 

 

5,363

 

Derivative instruments

 

 

2,430

 

 

 

2,181

 

Accrued liabilities

 

 

8,761

 

 

 

8,073

 

Total current liabilities

 

 

26,657

 

 

 

25,067

 

 

 

 

 

 

 

 

 

 

NON-CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

Senior secured credit facility, net

 

 

290,449

 

 

 

289,275

 

Senior notes, net

 

 

84,260

 

 

 

84,185

 

Deferred income taxes

 

 

80,492

 

 

 

82,102

 

Asset retirement obligations

 

 

11,042

 

 

 

11,065

 

Other non-current liabilities

 

 

604

 

 

 

466

 

Total liabilities

 

 

493,504

 

 

 

492,160

 

 

 

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none outstanding

 

 

 

 

Common stock, $0.01 par value, 180,000,000 shares authorized,

     94,605,086 and 94,533,246 issued and outstanding, respectively

 

 

946

 

 

 

945

 

Additional paid-in capital

 

 

742,614

 

 

 

742,391

 

Accumulated deficit

 

 

(143,366

)

 

 

(135,920

)

Total stockholders’ equity

 

 

600,194

 

 

 

607,416

 

Total liabilities and stockholders’ equity

 

$

1,093,698

 

 

$

1,099,576

 

 

See accompanying notes to these unaudited consolidated financial statements

1


Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

(In thousands, except shares and per-share amounts) 

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

Oil, NGLs and gas sales

 

$

28,772

 

 

$

26,355

 

 

 

 

 

 

 

 

 

 

EXPENSES:

 

 

 

 

 

 

 

 

Lease operating

 

 

5,268

 

 

 

4,170

 

Production and ad valorem taxes

 

 

2,500

 

 

 

2,357

 

Exploration

 

 

 

 

 

1,043

 

General and administrative (1)

 

 

6,567

 

 

 

5,928

 

Depletion, depreciation and amortization

 

 

15,680

 

 

 

17,962

 

Total expenses

 

 

30,015

 

 

 

31,460

 

 

 

 

 

 

 

 

 

 

OPERATING LOSS

 

 

(1,243

)

 

 

(5,105

)

 

 

 

 

 

 

 

 

 

OTHER:

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(5,886

)

 

 

(5,463

)

Gain on debt extinguishment

 

 

 

 

 

5,053

 

Commodity derivative (loss) gain

 

 

(1,928

)

 

 

3,444

 

Other income

 

 

1

 

 

 

3

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAX (BENEFIT) PROVISION

 

 

(9,056

)

 

 

(2,068

)

INCOME TAX (BENEFIT) PROVISION

 

 

(1,610

)

 

 

138,700

 

 

 

 

 

 

 

 

 

 

NET LOSS

 

$

(7,446

)

 

$

(140,768

)

 

 

 

 

 

 

 

 

 

LOSS PER SHARE:

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

(2.00

)

Diluted

 

$

(0.08

)

 

$

(2.00

)

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

Basic

 

 

94,516,280

 

 

 

70,409,303

 

Diluted

 

 

94,516,280

 

 

 

70,409,303

 

(1)  Includes non-cash share-based compensation expense as follows:

 

 

828

 

 

 

1,159

 

 

See accompanying notes to these unaudited consolidated financial statements

 

2


Approach Resources Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

(In thousands) 

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

Net loss

 

$

(7,446

)

 

$

(140,768

)

Adjustments to reconcile net loss to cash provided by operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

15,680

 

 

 

17,962

 

Amortization of debt issuance costs

 

 

262

 

 

 

219

 

Gain on debt extinguishment

 

 

 

 

 

(5,053

)

Commodity derivative loss (gain)

 

 

1,928

 

 

 

(3,444

)

Settlements of commodity derivatives

 

 

(1,531

)

 

 

(961

)

Exploration expense

 

 

 

 

 

1,033

 

Share-based compensation expense

 

 

828

 

 

 

1,159

 

Deferred income tax provision (benefit)

 

 

(1,610

)

 

 

138,700

 

Other non-cash items

 

 

 

 

 

(3

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

85

 

 

 

863

 

Prepaid expenses and other current assets

 

 

(466

)

 

 

(266

)

Accounts payable

 

 

(1,781

)

 

 

(3,973

)

Oil, NGLs and gas sales payable

 

 

72

 

 

 

318

 

Accrued liabilities

 

 

(636

)

 

 

(97

)

Cash provided by operating activities

 

 

5,385

 

 

 

5,689

 

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Additions to oil and gas properties

 

 

(13,685

)

 

 

(13,359

)

Additions to furniture, fixtures and equipment, net

 

 

(31

)

 

 

(6

)

Change in working capital related to investing activities

 

 

8,329

 

 

 

6,479

 

Cash used in investing activities

 

 

(5,387

)

 

 

(6,886

)

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

29,500

 

 

 

21,500

 

Repayment of amounts outstanding under credit facility

 

 

(28,500

)

 

 

(19,500

)

Equity issuance costs

 

 

 

 

 

(2,468

)

Tax withholdings related to restricted stock

 

 

(604

)

 

 

(93

)

Debt issuance costs

 

 

(14

)

 

 

 

Change in working capital related to financing activities

 

 

(379

)

 

 

1,816

 

Cash provided by financing activities

 

 

3

 

 

 

1,255

 

 

 

 

 

 

 

 

 

 

CHANGE IN CASH AND CASH EQUIVALENTS

 

 

1

 

 

 

58

 

CASH AND CASH EQUIVALENTS , beginning of period

 

$

21

 

 

$

21

 

 

 

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS , end of period

 

$

22

 

 

$

79

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,174

 

 

$

4,202

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTION:

 

 

 

 

 

 

 

 

Asset retirement obligations capitalized

 

$

 

 

$

11

 

 

See accompanying notes to these unaudited consolidated financial statements

 

 

 

3


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

 

1.  Summary of Significant Accounting Policies

Organization and Nature of Operations

Approach Resources Inc. (“Approach,” the “Company,” “we,” “us” or “our”) is an independent energy company engaged in the exploration, development, production and acquisition of oil and gas properties.  We focus on finding and developing oil and natural gas reserves in oil shale and tight gas sands.  Our properties are primarily located in the Permian Basin in West Texas. We also own interests in the East Texas Basin.

Consolidation, Basis of Presentation and Significant Estimates

The interim consolidated financial statements of the Company are unaudited and contain all adjustments (consisting primarily of normal recurring accruals) necessary for a fair statement of the results for the interim periods presented. Results for interim periods are not necessarily indicative of results to be expected for a full year, due in part to the volatility in prices for oil, natural gas liquids (“NGLs”) and gas, future commodity prices for commodity derivative contracts, global economic and financial market conditions, interest rates, access to sources of liquidity, estimates of reserves, drilling risks, geological risks, transportation restrictions, the timing of acquisitions, product supply and demand, market competition and interruptions of production. You should read these consolidated interim financial statements in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 9, 2018.

The accompanying interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries. Intercompany accounts and transactions are eliminated.  In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect reported amounts in the financial statements and disclosures of contingencies. Actual results may differ from those estimates. Significant assumptions are required in the valuation of proved oil and gas reserves, which affect our estimate of depletion expense as well as our impairment analyses. Significant assumptions also are required in our estimation of accrued liabilities, commodity derivatives, income tax provision, share-based compensation and asset retirement obligations. It is at least reasonably possible these estimates could be revised in the near term, and these revisions could be material.  Certain prior-year amounts have been reclassified to conform to current-year presentation.  These classifications have no impact on the net loss reported.

Recent Accounting Pronouncements

On January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) accounting standards update for “Revenue from Contracts with Customers,” which superseded the revenue recognition requirements in “Topic 605, Revenue Recognition,” using the modified retrospective method. Adoption of this standard did not have a significant impact on our consolidated statements of operations or cash flows. We implemented processes to ensure new contracts are reviewed for the appropriate accounting treatment and generate the disclosures required under the new standard. See Note 2 for additional disclosures required under this accounting standards update related to the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers including disaggregation of revenue.

In February 2016, FASB issued an accounting standards update for “Leases,” which amends existing guidance to require lessees to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. This new guidance is effective for interim and annual periods beginning after December 15, 2018, and we will adopt it using a modified retrospective approach. Currently, the Company is evaluating the standard’s applicability to our various contractual arrangements. We believe that the adoption of this standard will result in recognition of assets and liabilities on the balance sheet for current operating leases. The Company is still evaluating the impact of this new guidance on its consolidated financial statements.

In January 2017, FASB issued an accounting standards update for “Clarifying the Definition of a Business,” which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This standard requires entities to use a screen test to determine when an integrated set of assets and activities is not a business or if the integrated set of assets and activities needs to be further evaluated against the framework. We have adopted this standard as of January 1, 2018. Adoption of this standard did not  impact our consolidated statements of operations or cash flows. 

In August 2017, FASB issued an accounting standards update for “Derivatives and Hedging,”  which amends existing guidance related to the recognition and presentation requirements of hedge accounting, including eliminating the requirement to

4


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

separately measure and report hedge ineffectiveness, and presenting all items that affect earnings in the same income statement li ne item as the hedged item. This standard is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. We have elected to early adopt this standard in the first quarter of 2018. Adoption of this st andard did not  impact our consolidated statements of operations or cash flows.  Although we have not historically designated our derivative contracts as cash-flow hedges, we designated swap derivative contracts entered in April 2018 as cash-flow hedges. See Note 8 for additional information related to the derivative contracts designated as cash-flow hedges.

 

Prepaid Expenses and Other Assets

 

In April 2017, we entered into an agreement that secured pricing of a hydraulic fracturing services crew. Under this agreement, we made a prepayment of $5 million, to be used as we completed wells. We have used $1.2 million of this prepayment related to hydraulic fracturing services provided during the first year of the agreement. In March 2018, this agreement was terminated and $3.8 million of the unused prepaid balance was refunded to us.

 

2.  Revenue Recognition

 

Revenues for the sale of oil, NGLs, and gas are recognized as the product is delivered to our customers’ custody transfer points and collectability is reasonably assured. We fulfill the performance obligations under our customer contracts through daily delivery of oil, NGLs and gas to our customers’ custody transfer points and revenues are recorded on a monthly basis. The prices received for oil, NGLs and natural gas sales under our contracts are generally derived from stated market prices which are then adjusted to reflect deductions including transportation, fractionation and processing. As a result, our revenues from the sale of oil, natural gas and NGLs will decrease if market prices decline. The sales of oil, NGLs and gas as presented on the Consolidated Statements of Operations represent the Company’s share of revenues net of royalties and excluding revenue interests owned by others. When selling oil, NGLs and gas on behalf of royalty owners or working interest owners, the Company is acting as an agent and thus reports the revenue on a net basis. To the extent actual volumes and prices of oil and natural gas sales are unavailable for a given reporting period because of timing or information not received from third parties, the expected sales volumes and prices for those properties are estimated and recorded.

 

The following table presents our disaggregated revenue by major source for the three months ended March 31, 2018, and 2017 (in thousands).

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

Oil

 

$

16,343

 

 

$

13,694

 

NGLs

 

 

7,332

 

 

 

6,060

 

Gas

 

 

5,097

 

 

 

6,601

 

Total oil, NGLs and gas sales

 

$

28,772

 

 

$

26,355

 

 

 

 

5


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

3 .  Earnings Per Common Share

We report basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share, which includes the effect of all potentially dilutive securities unless their impact is antidilutive. The following table provides a reconciliation of the numerators and denominators of our basic and diluted earnings per share (dollars in thousands, except per-share amounts).

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Income (numerator):

 

 

 

 

 

 

 

 

Net loss – basic

 

$

(7,446

)

 

$

(140,768

)

 

 

 

 

 

 

 

 

 

Weighted average shares (denominator):

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

94,516,280

 

 

 

70,409,303

 

Dilution effect of share-based compensation, treasury

   method (1)

 

 

 

 

 

 

Weighted average shares – diluted

 

 

94,516,280

 

 

 

70,409,303

 

 

 

 

 

 

 

 

 

 

Net loss per share:

 

 

 

 

 

 

 

 

Basic

 

$

(0.08

)

 

$

(2.00

)

Diluted

 

$

(0.08

)

 

$

(2.00

)

 

(1)

Approximately 39,000 options to purchase our common stock were excluded from this calculation because they were antidilutive for the three months ended March 31, 2017. No options were outstanding as of March 31, 2018, as they had expired.

 

 

4. Equity Exchange Transactions

 

Debt exchange

 

On November 2, 2016, we entered into an exchange agreement with Wilks Brothers, LLC and SDW Investments, LLC (collectively, “Wilks”) the largest holder of our 7% Senior Notes due 2021 (the “Senior Notes”), to exchange $130,552,000 principal amount of our Senior Notes for 39,165,600 newly issued shares of common stock, par value $0.01 per share (the “Initial Exchange”). On January 26, 2017, our stockholders approved the Exchange Transactions (defined below) and an increase in our authorized common stock from 90 million shares to 180 million shares.  We closed the Initial Exchange on January 27, 2017, and paid $1.1 million of accrued interest on the Senior Notes held by Wilks. In connection with the Initial Exchange, a second supplemental indenture became effective, which removed certain covenants and events of default from the indenture governing our Senior Notes and eliminated certain restrictive covenants discussed in Note 5.

 

On March 22, 2017, we exchanged an additional $14,528,000 principal amount of outstanding Senior Notes for 4,009,728 shares of our common stock (the “Follow-On Exchange”).

 

The Initial Exchange and the Follow-On Exchange (together, the “Exchange Transactions”) reduced the principal amount of outstanding Senior Notes by $145.1 million and reduced interest payments by $44.3 million over the remaining term of the Senior Notes.  The Exchange Transactions were accounted for as a debt extinguishment. A gain of $5.1 million was recognized on the Exchange Transactions for the difference between the fair market value of the shares issued, a Level 1 fair value measurement, and the net carrying value of the Senior Notes exchanged. We incurred equity issuance costs of $2.8 million related to the Exchange Transactions, which were recorded as a reduction to additional paid-in capital.

 

The Exchange Transactions triggered a cumulative change in ownership of our common stock by more than 50% under Section 382 of the Internal Revenue Code as of March 22, 2017. This established an annual limitation on the usage of our pre-change net operating losses (“NOLs”) in the future. Accordingly, we recognized a write-off of deferred tax assets of $139.1 million.

 

Acquisition

 

6


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

On November 1, 2017, we entered into a definitive agreement (the “ Purchase Agreement”) to acquire producing properties directly adjacent to our acreage in the Permian Basin (the “Bolt-On Acquisition”). The Bolt-On Acquisition closed on November 20, 2017, and we issued 7,573,403 newly issued shares of common stock, par va lue $0.01 per share, with an effective date of September 1, 2017. The purchase price was finalized in April 2018, and we expect to receive 142,362 of the previously issued shares of our common stock, which will be retired , pursuant to adjustments under the Purchase Agreement .

 

5. Long-Term Debt

The following table provides a summary of our long-term debt at March 31, 2018, and December 31, 2017 (in thousands).

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Senior secured credit facility:

 

 

 

 

 

 

 

 

Outstanding borrowings

 

$

292,000

 

 

$

291,000

 

Debt issuance costs

 

 

(1,551

)

 

 

(1,725

)

Senior secured credit facility, net

 

 

290,449

 

 

 

289,275

 

Senior notes:

 

 

 

 

 

 

 

 

Principal

 

 

85,240

 

 

 

85,240

 

Debt issuance costs

 

 

(980

)

 

 

(1,055

)

Senior notes, net

 

 

84,260

 

 

 

84,185

 

Total long-term debt

 

$

374,709

 

 

$

373,460

 

 

Senior Secured Credit Facility

At March 31, 2018, the borrowing base and aggregate lender commitments under our amended and restated senior secured credit facility (the “Credit Facility”) were $325 million, with maximum commitments from the lenders of $1 billion. The Credit Facility has a maturity date of May 7, 2020.  The borrowing base is redetermined semi-annually based on our oil, NGLs and gas reserves.  We, or the lenders, can each request one additional borrowing base redetermination each calendar year. Our semi-annual borrowing base redetermination was completed on May 1, 2018, and our borrowing base and aggregate lender commitments were reaffirmed at $325 million.

At March 31, 2018, borrowings under the Credit Facility bore interest based on the agent bank’s prime rate plus an applicable margin ranging from 2% to 3%, or the sum of the LIBOR rate plus an applicable margin ranging from 3% to 4%.  In addition, we pay an annual commitment fee of 0.50% of unused borrowings available under the Credit Facility. Margins vary based on the borrowings outstanding compared to the borrowing base of the lenders.

We had outstanding borrowings of $292 million under the Credit Facility at March 31, 2018, compared to $291 million of outstanding borrowings at December 31, 2017. The weighted average interest rate applicable to borrowings under the Credit Facility for the three months ended March 31, 2018, was 5.5%. We had outstanding unused letters of credit under the Credit Facility totaling $0.3 million at March 31, 2018, and December 31, 2017, respectively, which reduce amounts available for borrowing under the Credit Facility.

Obligations under the Credit Facility are secured by mortgages on substantially all of the oil and gas properties of the Company and its subsidiaries. The Company is required to grant liens in favor of the lenders covering the oil and gas properties of the Company and its subsidiaries representing at least 95% of the total value of all oil and gas properties of the Company and its subsidiaries.

On December 21, 2017, we entered into a fourth amendment to the Credit Facility. The fourth amendment, among other things, (a) extended the maturity date of the Credit Facility from May 7, 2019, to May 7, 2020, (b) increased the  applicable margin rates on borrowings by  50 basis points, (c) required the Company to hedge 50% of the Company’s estimated 2018 oil and gas production from proved developed producing reserves and (d) amended our financial covenants as described below. In connection with the fourth amendment to the Credit Facility, we incurred $1 million of debt issuance costs.

7


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

Covenants

The Credit Facility contains three principal financial covenants:

 

a consolidated interest coverage ratio covenant that requires us to maintain a ratio of (i) consolidated EBITDAX for the period of four fiscal quarters then ending to (ii) Cash Interest Expense for such period as of the last day of any fiscal quarter of not less than 1.75 to 1.0 through December 31, 2018, a ratio of not less than 2.25 to 1.0 through December 31, 2019, and 2.5 to 1.0 thereafter. EBITDAX is defined as consolidated net (loss) income plus (i) interest expense, net, (ii) income tax provision (benefit), (iii) depreciation, depletion, amortization, (iv) exploration expenses and (v) other noncash loss or expense (including share-based compensation and the change in fair value of any commodity derivatives), less noncash income. Cash Interest Expense is calculated as interest expense, net less amortization of debt issuance costs. At March 31, 2018, our consolidated interest coverage ratio was 2.6 to 1.0;

 

a consolidated modified current ratio covenant that requires us to maintain a ratio of not less than 1.0 to 1.0 as of the last day of any fiscal quarter. The consolidated modified current ratio is defined as the ratio of (i) current assets plus funds available under our revolving credit facility, less the current derivative asset, to (ii) current liabilities less the current derivative liability. At March 31, 2018, our consolidated modified current ratio was 1.8 to 1.0; and

 

a consolidated total leverage ratio covenant that imposes a maximum permitted ratio of (i) Total Debt to (ii) EBITDAX for the period of four fiscal quarters then ending of not more than 5.0 to 1.0, as of the last day of any fiscal quarter from March 31, 2019, through June 30, 2019, thereafter not more than 4.75 to 1.0 as of the last day of any fiscal quarter through December 31, 2019, and (iii) not more than 4.0 to 1.0 as of the last day of any fiscal quarter thereafter. Total Debt is defined as the face or principal amount of debt. Our leverage ratio is currently above the level that will be required as of March 31, 2019. At March 31, 2018, our leverage ratio was 6.9 to 1.0.

The Credit Facility also contains covenants restricting cash distributions and other restricted payments, transactions with affiliates, incurrence of other debt, consolidations and mergers, the level of operating leases, asset sales, investment in other entities and liens on properties.

In addition, the obligations of the Company may be accelerated upon the occurrence of an Event of Default (as defined in the Credit Facility). Events of Default include customary events for a financing agreement of this type, including, without limitation, payment defaults, the inaccuracy of representations and warranties, defaults in the performance of affirmative or negative covenants, defaults on other indebtedness of the Company or its subsidiaries, bankruptcy or related defaults, defaults related to judgments and the occurrence of a Change of Control (as defined in the Credit Facility), which includes instances where a third party becomes the beneficial owner of more than 50% of the Company’s outstanding equity interests entitled to vote.

Senior Notes

At March 31, 2018, and December 31, 2017, $85.2 million of Senior Notes were outstanding. We issued the Senior Notes under a senior indenture dated June 11, 2013, among the Company, our subsidiary guarantors and Wilmington Trust, National Association, as successor trustee. The senior indenture, as supplemented by supplemental indentures dated June 11, 2013, and December 20, 2016, is referred to as the “Indenture.”

We may redeem some or all of the Senior Notes at specified redemption prices, plus accrued and unpaid interest to the redemption date. The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by each of our subsidiaries, subject to certain customary release provisions. A subsidiary guarantor may be released from its obligations under the guarantee:

 

in connection with any sale or other disposition of all or substantially all of the assets of that guarantor (including by way of merger or consolidation) to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary guarantor, if the sale or other disposition otherwise complies with the Indenture;

 

in connection with any sale or other disposition of the capital stock of that guarantor to a person that is not (either before or after giving effect to such transaction) the Company or a subsidiary guarantor, if that guarantor no longer qualifies as a subsidiary of the Company as a result of such disposition and the sale or other disposition otherwise complies with the Indenture;

 

if the Company designates any restricted subsidiary that is a guarantor to be an unrestricted subsidiary in accordance with the Indenture;

8


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

 

upon defeasance or covenant defeasance of the notes or satisfaction and discharge of the Indenture, in each case, in accordance with the Indenture;

 

upon the liquidation or dissolution of that guarantor, provided that no default or event of default occurs under the Indenture as a result thereof or shall have occurred and is continuing; or

 

in the case of any restricted subsidiary that, after the issue date of the notes is required under the Indenture to guarantee the notes because it becomes a guarantor of indebtedness issued or an obligor under a credit facility with respect to the Company and/or its subsidiaries, upon the release or discharge in full from its (i) guarantee of such indebtedness or (ii) obligation under such credit facility, in each case, which resulted in such restricted subsidiary’s obligation to guarantee the notes.

The Indenture contains limited events of default.

Subsidiary Guarantors

The Senior Notes are guaranteed on a senior unsecured basis by each of our consolidated subsidiaries.  Approach Resources Inc. is a holding company with no independent assets or operations. The subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the Company other than the subsidiary guarantors are minor. There are no significant restrictions on the Company’s ability, or the ability of any subsidiary guarantor, to obtain funds from its subsidiaries through dividends, loans, advances or otherwise.

At March 31, 2018, we were in compliance with all of our covenants, and there were no existing defaults or events of default, under our debt instruments.

 

 

6.  Commitments and Contingencies

Our contractual obligations include long-term debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers.  Since December 31, 2017, there have been no material changes to our contractual obligations.

We are involved in various legal and regulatory proceedings arising in the normal course of business.  While we cannot predict the outcome of these proceedings with certainty, we do not believe that an adverse result in any pending legal or regulatory proceeding, individually or in the aggregate, would be material to our consolidated financial condition or cash flows.

 

 

7.  Income Taxes

For the three months ended March 31, 2018, our income tax benefit was $1.6 million, compared to an income tax provision of $138.7 million for the three months ended March 31, 2017. The following table reconciles our income tax expense for the three months ended March 31, 2018, and 2017, to the U.S. federal statutory rates of 21% and 35%, respectively (dollars in thousands).

 

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Statutory tax at 21% and 35%, respectively

 

$

(1,902

)

 

$

(724

)

State taxes, net of federal impact

 

 

162

 

 

 

41

 

Share-based compensation tax shortfall

 

 

70

 

 

 

290

 

Nondeductible compensation

 

 

57

 

 

 

 

Other differences

 

 

3

 

 

 

3

 

Write-off of deferred tax assets

 

 

 

 

$

139,090

 

Income tax (benefit) provision

 

$

(1,610

)

 

$

138,700

 

 

On December 22, 2017, the Tax Cuts and Jobs Act was enacted which, among other things, lowered the U.S. Federal income tax rate applicable to corporations from 35% to 21% and repealed the corporate alternative minimum tax. 

The Exchange Transactions triggered a cumulative change in ownership of our common stock by more than 50% under Section 382 of the Internal Revenue Code as of March 22, 2017. This established an annual limitation on the usage of our pre-change NOLs in

9


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

the future. Accordingly, we recognized a write-off of our deferred tax assets of $139.1 million in the three months ended March 31, 2017.

 

8.  Derivative Instruments and Fair Value Measurements

The following table provides our outstanding commodity derivative positions at March 31, 2018.

 

Commodity and Period

 

Contract

Type

 

Volume Transacted

 

Contract Price

Crude Oil

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

300 Bbls/day

 

$50.00/Bbl

April 2018 – June 2018

 

Collar

 

500 Bbls/day

 

$55.00/Bbl - $60.00/Bbl

April 2018 – September 2018

 

Swap

 

1,500 Bbls/day

 

$60.50/Bbl

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200,000 MMBtu/month

 

$3.085/MMBtu

April 2018 – December 2018

 

Swap

 

250,000 MMBtu/month

 

$3.084/MMBtu

 

 

 

 

 

 

 

NGLs (C2 - Ethane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

1,000 Bbls/day

 

$11.424/Bbl

NGLs (C3 - Propane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

600 Bbls/day

 

$32.991/Bbl

NGLs (IC4 - Isobutane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

50 Bbls/day

 

$38.262/Bbl

NGLs (NC4 - Butane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$38.22/Bbl

NGLs (C5 - Pentane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$56.364/Bbl

 

After March 31, 2018, we entered into swaps for the NYMEX Calendar Monthly Average Roll (the “CMA Roll”) covering 2,000 Bbls of oil per day for May 2018 through December 2018 at $0.66/bbl. Swaps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue.

 

The following table summarizes the fair value of our open commodity derivatives as of March 31, 2018, and December 31, 2017 (in thousands).

 

 

 

Balance Sheet Location

 

Fair Value

 

 

 

 

 

March 31,

 

 

December   31,

 

 

 

 

 

2018

 

 

2017

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

Commodity derivatives

 

Derivative assets

 

$

1,250

 

 

$

1,398

 

Commodity derivatives

 

Derivative liabilities

 

 

(2,430

)

 

 

(2,181

)

 

The following table summarizes the change in the fair value of our commodity derivatives (in thousands).

 

 

 

 

 

Three Months Ended

 

 

 

 

 

March 31,

 

 

 

 

 

2018

 

 

2017

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

Commodity derivatives

 

Net cash payment on derivative settlements

 

$

(1,531

)

 

$

(961

)

 

 

Non-cash fair value (loss) gain on derivatives

 

 

(397

)

 

 

4,405

 

 

 

Commodity derivative (loss) gain

 

$

(1,928

)

 

$

3,444

 

 

10


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

Derivative assets and liabilities , at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts.  Changes in the fair value of our commodity derivative contrac ts, not designated as cash-flow hedges, are recorded in earnings as they occur and included in income (expense) on our consolidated statements of operations.  We estimate the fair values of swap contracts based on the present value of the difference in exc hange-quoted forward price curves and contractual settlement prices multiplied by notional quantities.  We internally valued the option contracts using industry-standard option pricing models and observable market inputs.  We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets.

We are exposed to credit losses in the event of nonperformance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.

To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:

 

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  The shares of our common stock issued in the Exchange Transactions were valued as a Level 1 measurement. At March 31, 2018, we had no Level 1 measurements.

 

Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data, which is derived by combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  At March 31, 2018, all of our commodity derivatives were valued using Level 2 measurements.

 

Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At March 31, 2018, we had no recurring Level 3 measurements.

Financial Instruments Not Recorded at Fair Value

The following table sets forth the fair values of financial instruments that are not recorded at fair value on our financial statements (in thousands).

 

 

 

March 31, 2018

 

 

 

Carrying

Amount

 

 

Fair Value

 

Senior Notes

 

$

84,260

 

 

$

80,978

 

 

The fair value of the Senior Notes is based on quoted market prices, but the Senior Notes are not actively traded in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.

 

 

9.  Share-Based Compensation

In March 2018, we issued 774,590 cash-settled performance awards, subject to certain performance conditions, and 387,295 restricted shares subject to three-year total shareholder return (“TSR”) conditions, assuming maximum TSR, to our executive officers. The aggregate fair market value of the cash-settled performance awards and TSR restricted shares on the date of grant was approximately $2.4 million and $0.8 million, respectively, to be expensed over a service period of approximately three years.

11


Approach Resources Inc. and Subsidiaries

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2018

 

Cash-settled performance awards

As of March 31, 2018, we had 1,508,286 unvested cash-settled performance awards, subject to certain performance conditions outstanding. The cash-settled performance awards represent a non-equity unit with a conversion value equal to the fair market value of a share of the Company’s common stock at the vesting date. These awards are classified as liability awards due to the cash settlement feature. Compensation costs associated with the cash-settled performance awards are re-measured at each interim reporting period and an adjustment is recorded in general and administrative expenses on our consolidated statements of operations. For the three months ended March 31, 2018, we recognized $0.3 million in expense, compared to a benefit of $0.1 million for the three months ended March 31, 2017. At March 31, 2018, we recorded a current liability of $0.8 million and a non-current liability of $0.6 million related to the cash-settled performance awards on our consolidated balance sheets.  During the three months ended March 31, 2018, we paid $1 million related to vested cash-settled performance awards.

 

10.  Related Party Transactions

 

Wilks, a related party, purchased a portion of our outstanding Senior Notes in the open market subsequent to the Exchange Transactions. The Company believes that Wilks held approximately $60 million of our outstanding Senior Notes as of March 31, 2018. The Senior Notes held by Wilks are included in Senior Notes, net on our consolidated balance sheets. Our interest expense includes interest attributable to any Senior Notes held by Wilks on our consolidated statements of operations.

 

In April 2018, we engaged ProFrac Services, LLC (“ProFrac”) to perform completion services to the Company. There is no required minimum or maximum number of wells committed, and we intend to use ProFrac on a well-by-well basis throughout 2018. Matthew D. Wilks, a member of our Board of Directors, serves as the Chief Financial Officer of ProFrac, and Wilks has an equity ownership interest in ProFrac.

 

 

12


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion is intended to assist in understanding our results of operations and our financial condition. This section should be read in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 9, 2018.  Our consolidated financial statements and the accompanying notes included elsewhere in this report contain additional information that should be referred to when reviewing this material. Certain statements in this discussion may be forward-looking. These forward-looking statements involve risks and uncertainties, which could cause actual results to differ from those expressed in this report.  A glossary containing the meaning of the oil and gas industry terms used in this management’s discussion and analysis follows the “Results of Operations” table in this Item 2.

Cautionary Statement Regarding Forward-Looking Statements

Various statements in this report, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements may include projections and estimates concerning the timing and success of specific projects, typical well economics and our future reserves, production, revenues, costs, income, capital spending, 3-D seismic operations, interpretation and results and obtaining permits and regulatory approvals. When used in this report, the words “will,” “believe,” “intend,” “expect,” “may,” “should,” “anticipate,” “could,” “estimate,” “plan,” “predict,” “project,” “potential” or their negatives, other similar expressions or the statements that include those words, are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words.

These forward-looking statements are largely based on our expectations, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors. Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate.  We caution all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur.  Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed or referred to in the “Risk Factors” section and elsewhere in this report.  All forward-looking statements speak only as of the date of this report. We disclaim any obligation to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, unless required by law. These cautionary statements qualify all forward-looking statements attributable to us, or persons acting on our behalf. The risks, contingencies and uncertainties relate to, among other matters, the following:

 

uncertainties in drilling, exploring for and producing oil and gas;

 

oil, NGLs and natural gas prices;

 

overall United States and global economic and financial market conditions;

 

our leverage negatively affecting our semi-annual redetermination of our revolving credit facility and our ability to comply with the covenants in our revolving credit facility;

 

domestic and foreign demand and supply for oil, NGLs, natural gas and the products derived from such hydrocarbons;

 

actions of the Organization of Petroleum Exporting Countries, its members and other state-controlled oil companies relating to oil price and production controls;

 

our ability to obtain additional financing necessary to fund our operations and capital expenditures and to meet our other obligations;

 

our ability to maintain a sound financial position;

 

issuance of our common stock in connection with potential refinancing transactions that may cause substantial dilution;

 

our cash flows and liquidity;

 

the effects of government regulation and permitting and other legal requirements, including laws or regulations that could restrict or prohibit hydraulic fracturing;

 

disruption of credit and capital markets;

13


 

 

disruptions to, capacity constraints in or other limitations on the pipeline systems that deliver our oil, NGLs and natural gas and other processing and transportation considerations;

 

marketing of oil, NGLs and natural gas;

 

high costs, shortages, delivery delays or unavailability of drilling and completion equipment, materials, labor or other services;

 

competition in the oil and gas industry;

 

uncertainty regarding our future operating results;

 

profitability of drilling locations;

 

interpretation of 3-D seismic data;

 

replacing our oil, NGLs and natural gas reserves;

 

our ability to retain and attract key personnel;

 

our business strategy, including our ability to recover oil, NGLs and natural gas in place associated with our Wolfcamp shale oil resource play in the Permian Basin;

 

development of our current asset base or property acquisitions;

 

estimated quantities of oil, NGLs and natural gas reserves and present value thereof;

 

plans, objectives, expectations and intentions contained in this report that are not historical; and

 

other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 9, 2018.

Overview

Approach Resources Inc. is an independent energy company focused on the exploration, development, production and acquisition of unconventional oil and gas reserves in the Midland Basin of the greater Permian Basin in West Texas, where we leased approximately 149,000 net acres as of March 31, 2018.  We believe our concentrated acreage position and extensive, integrated field infrastructure system provides us an opportunity to achieve cost, operating and recovery efficiencies in the development of our drilling inventory.   Our long-term business strategy is to create value by growing reserves and production in a cost efficient manner and at attractive rates of return.  We intend to pursue that strategy by developing resource potential from the Wolfcamp shale oil formation and pursuing acquisitions that meet our strategic and financial objectives. Additional drilling targets could include the Clearfork, Canyon Sands, Strawn and Ellenburger zones.  We sometimes refer to our development project in the Permian Basin as “Project Pangea,” which includes “Pangea West.”  Our management and technical team have a proven track record of finding and developing reserves through advanced drilling and completion techniques. As the operator of all of our estimated proved reserves and production, we have a high degree of control over capital expenditures and other operating matters.

At December 31, 2017, our estimated proved reserves were 181.5 million barrels of oil equivalent (“MMBoe”), made up of 28% oil, 32% NGLs and 40% gas. The proved developed reserves were 37% of our total proved reserves at December 31, 2017.  Substantially all of our proved reserves are located in the Permian Basin in Crockett and Schleicher counties, Texas.  At March 31, 2018, we owned working interests in 819 producing oil and gas wells.

First Quarter 2018 Activity

 

During the three months ended March 31, 2018, we produced 1,020 MBoe, or 11.3 MBoe/d.  We completed four horizontal wells. At March 31, 2018, we had six horizontal Wolfcamp wells waiting on completion.

2018 Capital Expenditures

For the three months ended March 31, 2018, our capital expenditures totaled $13.7 million, consisting of $12.4 million for drilling and completion activities and $1.3 million for infrastructure projects and equipment.  Our 2018 capital budget is a range of $50 million to $70 million. 

Our 2018 capital budget excludes acquisitions and lease extensions and renewals and is subject to change depending upon a number of factors, including prevailing and anticipated prices for oil, NGLs and gas, results of horizontal drilling and completions,

14


 

economic and industry conditions at the time of drilling, the availability of sufficient cap ital resources for drilling prospects, our financial results and the availability of lease extensions and renewals on reasonable terms. Although the impact of changes in these collective factors in the current commodity price environment is difficult to es timate, we currently expect to execute our development plan based on current conditions. To the extent there is a significant increase or decrease in commodity prices in the future, we will assess the impact on our development plan at that time, and we may respond to such changes by altering our capital budget or our development plan.

15


 

Results of Operations

The following table sets forth summary information regarding oil, NGLs and gas revenues, production, average product prices and average production costs and expenses for the three months ended March 31, 2018 and 2017.  We determine a barrel of oil equivalent using the ratio of six Mcf of natural gas to one Boe, and one barrel of NGLs to one Boe. The ratios of six Mcf of natural gas to one Boe and one barrel of NGLs to one Boe do not assume price equivalency and, given price differentials, the price for a Boe for natural gas or NGLs may differ significantly from the price for a barrel of oil.

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

Revenues (in thousands):

 

 

 

 

 

 

 

 

Oil

 

$

16,343

 

 

$

13,694

 

NGLs

 

 

7,332

 

 

 

6,060

 

Gas

 

 

5,097

 

 

 

6,601

 

Total oil, NGLs and gas sales

 

 

28,772

 

 

 

26,355

 

 

 

 

 

 

 

 

 

 

Net cash payment on derivative settlements

 

 

(1,531

)

 

 

(961

)

Total oil, NGLs and gas sales including derivative

   impact

 

$

27,241

 

 

$

25,394

 

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

Oil (MBbls)

 

 

272

 

 

 

278

 

NGLs (MBbls)

 

 

352

 

 

 

352

 

Gas (MMcf)

 

 

2,376

 

 

 

2,377

 

Total (MBoe)

 

 

1,020

 

 

 

1,027

 

Total (MBoe/d)

 

 

11.3

 

 

 

11.4

 

 

 

 

 

 

 

 

 

 

Average prices:

 

 

 

 

 

 

 

 

Oil (per Bbl)

 

$

60.04

 

 

$

49.17

 

NGLs (per Bbl)

 

 

20.84

 

 

 

17.20

 

Gas (per Mcf)

 

 

2.15

 

 

 

2.78

 

Total (per Boe)

 

 

28.21

 

 

 

25.67

 

 

 

 

 

 

 

 

 

 

Net cash payment on derivative settlements (per Boe)

 

 

(1.50

)

 

 

(0.94

)

Total including derivative impact (per Boe)

 

$

26.71

 

 

$

24.73

 

 

 

 

 

 

 

 

 

 

Costs and expenses (per Boe):

 

 

 

 

 

 

 

 

Lease operating

 

$

5.16

 

 

$

4.06

 

Production and ad valorem taxes

 

 

2.45

 

 

 

2.29

 

Exploration

 

 

 

 

 

1.02

 

General and administrative

 

 

6.44

 

 

 

5.77

 

Depletion, depreciation and amortization

 

 

15.37

 

 

 

17.49

 

 

Glossary

Bbl.   One stock tank barrel, of 42 U.S. gallons liquid volume, used herein to reference oil, condensate or NGLs.

Boe.   Barrel of oil equivalent, determined using the ratio of six Mcf of natural gas to one Bbl of oil equivalent, and one Bbl of NGLs to one Bbl of oil equivalent.

MBbl.   Thousand barrels of oil, condensate or NGLs.

MBoe.   Thousand barrels of oil equivalent.

Mcf.   Thousand cubic feet of natural gas.

MMBoe.   Million barrels of oil equivalent.

16


 

MMBtu. Million British thermal units.

MMcf.   Million cubic feet of natural gas.

NGLs.   Natural gas liquids.

NYMEX. New York Mercantile Exchange.

/d.   “Per day” when used with volumetric units or dollars.

Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017

Oil, NGLs and gas sales .  Oil, NGLs and gas sales increased $2.4 million, or 9%, for the three months ended March 31, 2018, to $28.8 million, compared to $26.4 million for the three months ended March 31, 2017.  The increase in oil, NGLs and gas sales was due to an increase in average realized commodity prices ($2.6 million) partially offset by a decrease in production volumes ($0.2 million).  Production volumes decreased as a result of no well completions in the fourth quarter of 2017. We expect oil, NGLs and gas sales to increase in 2018 compared to 2017 due to improved commodity prices and an increase in production due to increased well completion activity.

Net loss .  Net loss for the three months ended March 31, 2018, was $7.4 million, or $0.08 per diluted share, compared to $140.8 million, or $2.00 per diluted share, for the three months ended March 31, 2017. Net loss for the three months ended March 31, 2018, included a commodity derivative loss of $1.9 million. The decrease in the net loss for the three months ended March 31, 2018, was primarily due to the debt-for-equity exchange transactions completed in the three months ended March 31, 2017. In connection with exchange transactions, we recognized a gain on debt extinguishment of $5.1 million and a write-off of deferred tax assets of $139.1 million resulting from our cumulative change in ownership.

Oil, NGLs and gas production.   Production for the three months ended March 31, 2018, totaled 1,020 MBoe (11.3 MBoe/d), compared to production of 1,027 MBoe (11.4 MBoe/d) in the prior-year period, a 1% decrease.  Production for the three months ended March 31, 2018, and March 31, 2017 was 27% oil, 34% NGLs and 39% gas.  Production volumes decreased during the three months ended March 31, 2018, as a result of no well completions in the fourth quarter of 2017. We expect production to increase from current levels due to increased well completion activity.

Commodity derivative (loss) gain.    The following table sets forth the components of our commodity derivative (loss) gain for the three months ended March 31, 2018, and 2017 (dollars in thousands).

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Net cash payment on derivative settlements

 

$

(1,531

)

 

$

(961

)

Non-cash fair value (loss) gain on derivatives

 

 

(397

)

 

 

4,405

 

Commodity derivative (loss) gain

 

$

(1,928

)

 

$

3,444

 

Historically, we have not designated our derivative instruments as cash-flow hedges. Commodity derivative settlements are derived from the relative movement of commodity prices in relation to the fixed notional pricing in our derivative contracts for the respective years. As commodity prices increase or decrease, the fair value of the open portion of those positions decreases or increases, respectively. We record our open derivative instruments at fair value on our consolidated balance sheets as either derivative assets or liabilities. For commodity derivatives not designated as a cash-flow hedge, we record changes in such fair value in earnings on our consolidated statements of operations under the caption entitled “commodity derivative (loss) gain.”

17


 

After March 31, 2018, we entered into basis swaps for the NYMEX Calendar Monthly Average Roll (the “CMA Roll ) covering 2,000 Bbls per day for May 2018 through December 2018 at $0.66/bbl. Basis swaps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue.

Lease operating. Our lease operating expenses (“LOE”) increased $1.1 million, or 26%, for the three months ended March 31, 2018, to $5.3 million, or $5.16 per Boe, compared to $4.2 million, or $4.06 per Boe, for the three months ended March 31, 2017.  The increase in LOE per Boe for the three months ended March 31, 2018, was primarily due to well repairs, workovers and maintenance. We expect LOE per Boe to decrease from the current levels due to a decrease in well repairs, workovers and maintenance and an increase in production. The following table summarizes LOE per Boe.

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

% Change (Boe)

 

Compressor rental and repair

 

$

1.8

 

 

$

1.74

 

 

$

1.8

 

 

$

1.68

 

 

$

-

 

 

$

0.06

 

 

 

3.6

%

Well repairs, workovers and maintenance

 

 

1.6

 

 

 

1.56

 

 

 

0.9

 

 

 

0.89

 

 

 

0.7

 

 

 

0.67

 

 

 

75.3

 

Water handling and other

 

 

1.1

 

 

 

1.08

 

 

 

0.8

 

 

 

0.81

 

 

 

0.3

 

 

 

0.27

 

 

 

33.3

 

Pumpers and supervision

 

 

0.8

 

 

 

0.78

 

 

 

0.7

 

 

 

0.68

 

 

 

0.1

 

 

 

0.10

 

 

 

14.7

 

Total

 

$

5.3

 

 

$

5.16

 

 

$

4.2

 

 

$

4.06

 

 

$

1.1

 

 

$

1.10

 

 

 

27.1

%

 

Production and ad valorem taxes. Our production and ad valorem taxes increased $0.1 million, or 6%, for the three months ended March 31, 2018, to $2.5 million compared to $2.4 million for the three months ended March 31, 2017.  Production and ad valorem taxes were $2.45 per Boe and $2.29 per Boe and approximately 8.7% and 8.9% of oil, NGLs and gas sales for the three months ended March 31, 2018 and 2017, respectively. The increase in production and ad valorem taxes was primarily a function of the increase in oil, NGLs and gas sales between the two periods.  

Exploration. We recorded no exploration expense for the three months ended March 31, 2018, compared to $1 million, or $1.02 per Boe, for the three months ended March 31, 2017.  The decrease in exploration expense was primarily due to no lease expirations in the first quarter of 2018.

General and administrative . Our general and administrative expenses (“G&A”) increased $0.7 million, or 11%, to $6.6 million, or $6.44 per Boe, for the three months ended March 31, 2018, compared to $5.9 million, or $5.77 per Boe, for the three months ended March 31, 2017. The increase in G&A and G&A per Boe was primarily due an increase in salaries and benefits. For the three months ended March 31, 2018, G&A included an expense of $0.3 million compared to a reduction in expense of $0.1 million for the three months ended March 31, 2017, related to cash-settled performance awards. These awards are re-measured each interim reporting period based on the fair market value of our common stock. Significant changes in the fair market value of our common stock will impact G&A and G&A per Boe. The following table summarizes G&A in millions and G&A per Boe.

 

 

 

Three Months Ended March 31,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

2017

 

 

Change

 

 

 

 

 

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

$MM

 

 

Boe

 

 

% Change (Boe)

 

Salaries and benefits

 

$

3.8

 

 

$

3.70

 

 

$

3.1

 

 

$

3.05

 

 

$

0.7

 

 

$

0.65

 

 

 

21.3

%

Share-based compensation

 

 

0.8

 

 

$

0.81

 

 

 

1.2

 

 

$

1.13

 

 

 

(0.4

)

 

 

(0.32

)

 

 

(28.3

)

Professional fees

 

 

0.7

 

 

$

0.71

 

 

 

0.5

 

 

$

0.53

 

 

 

0.2

 

 

 

0.18

 

 

 

34.0

 

Other

 

 

1.3

 

 

$

1.22

 

 

 

1.1

 

 

$

1.06

 

 

 

0.2

 

 

 

0.16

 

 

 

15.1

 

Total

 

$

6.6

 

 

$

6.44

 

 

$

5.9

 

 

$

5.77

 

 

$

0.7

 

 

$

0.67

 

 

 

11.6

%

 

Depletion, depreciation and amortization.   Our depletion, depreciation and amortization expense (“DD&A”) decreased $2.3 million, or 13%, to $15.7 million for the three months ended March 31, 2018, compared to $18 million for the three months ended March 31, 2017.  Our DD&A per Boe decreased by $2.12, or 12%, to $15.37 per Boe for the three months ended March 31, 2018, compared to $17.49 per Boe for the three months ended March 31, 2017.   The decrease in DD&A and DD&A per Boe over the prior-year period was primarily due to an increase in estimated proved developed reserves.   

 

18


 

Interest expense, net.  Our interest expense, net, increased $0.4 million, or 8%, to $5.9 million for the three months ended March 31, 2018, compared to $5.5 million for the three months ended March 31, 2017.  This increase was primarily due to an increase in the applicable margin rates, outstanding borrowings and floating interest rates under our revolving credit facility.

 

Gain on debt extinguishment. In the three months ended March 31, 2018, we did not repurchase or retire any outstanding debt. In the three months ended March 31, 2017, we completed two debt-for-equity exchange transactions, which reduced the principal amount of our outstanding 7% Senior Notes due 2021 (“Senior Notes”) by $145.1 million. We recognized a gain of $5.1 million on the exchange transactions for the difference between the fair market value of the shares issued, a Level 1 fair value measurement, and the net carrying value of the Senior Notes exchanged.

Income taxes. For the three months ended March 31, 2018, our income tax benefit was $1.6 million, compared to an income tax provision of $138.7 million for the three months ended March 31, 2017. The following table reconciles our income tax expense for the three months ended March 31, 2018, and 2017, to the U.S. federal statutory rates of 21% and 35%, respectively (dollars in thousands).

 

 

March 31,

 

 

March 31,

 

 

 

2018

 

 

2017

 

Statutory tax at 21% and 35%, respectively

 

$

(1,902

)

 

$

(724

)

State taxes, net of federal impact

 

 

162

 

 

 

41

 

Share-based compensation tax shortfall

 

 

70

 

 

 

290

 

Nondeductible compensation

 

 

57

 

 

 

 

Other differences

 

 

3

 

 

 

3

 

Write-off of deferred tax assets

 

 

 

 

$

139,090

 

Income tax (benefit) provision

 

$

(1,610

)

 

$

138,700

 

On December 22, 2017, the Tax Cuts and Jobs Act was enacted which, among other things, lowered the U.S. Federal income tax rate applicable to corporations from 35% to 21% and repealed the corporate alternative minimum tax. We expect our effective tax rate to be lower compared to the prior year due to the change in tax legislation.

In the three months ended March 31, 2017, i n connection with the debt-for-equity exchange transactions, we recorded a a write-off of deferred tax assets of $139.1 million resulting from our cumulative change in ownership.

Liquidity and Capital Resources

We generally will rely on cash generated from operations, to the extent available, borrowings under our revolving credit facility and, to the extent that credit and capital market conditions will allow, future equity and debt offerings to satisfy our liquidity needs. Our ability to fund planned capital expenditures and to make acquisitions depends upon commodity prices, our future operating performance, availability of borrowings under our revolving credit facility, and more broadly, on the availability of equity and debt financing, which is affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot predict whether additional liquidity from equity or debt financings beyond our revolving credit facility will be available on acceptable terms, or at all, in the foreseeable future.

Our cash flow from operations is driven by commodity prices, production volumes and the effect of commodity derivatives. Cash flows from operations are primarily used to fund exploration and development of our oil and gas properties. If commodity prices decline from current levels, our operating cash flows will decrease and our lenders may reduce our borrowing base, thus limiting the amounts available to fund future capital expenditures. If we are unable to replace our oil, NGLs and gas reserves through acquisition, development and exploration, we may also suffer a reduction in operating cash flows and access to funds under our revolving credit facility. At March 31, 2018, we were in compliance with all required covenants under our revolving credit facility. If commodity prices decline from current levels or we fail to reduce our total debt, we may trigger non-compliance with required financial covenants in the future and otherwise adversely impact our ability to operate.

We believe we have adequate liquidity from cash generated from operations and unused borrowing capacity under our revolving credit facility for current working capital needs and maintenance of our current development plan. However, we may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future development of reserves, acquisitions, additional working capital or other liquidity needs, if such financing is available on acceptable terms. We cannot guarantee that such financing will be available on acceptable terms or at all. Using some of these financing sources may require approval from the lenders under our revolving credit facility.

 

19


 

Liquidity

We define liquidity as funds available under our revolving credit facility and cash and cash equivalents.   Our liquidity is subject to our continued compliance with the financial covenants under our revolving credit facility. At March 31, 2018, we were in compliance with all of our covenants, and there were no existing defaults or events of default under our debt instruments. See Note 5 to our consolidated financial statements in this report for additional information regarding the financial covenants under our revolving credit facility. At March 31, 2018, we had $292 million in outstanding borrowings under our revolving credit facility and liquidity of $32.7 million, compared to $291 million in outstanding borrowings under our revolving credit facility and liquidity of $33.7 million at December 31, 2017. The table below summarizes our liquidity position at March 31, 2018, and December 31, 2017 (dollars in thousands).

 

 

 

Liquidity at

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Borrowing base

 

$

325,000

 

 

$

325,000

 

Cash and cash equivalents

 

22

 

 

 

21

 

Long-term debt – Credit Facility

 

 

(292,000

)

 

 

(291,000

)

Undrawn letters of credit

 

 

(325

)

 

 

(325

)

Liquidity

 

$

32,697

 

 

$

33,696

 

Working Capital

Our working capital is affected primarily by our capital spending program.  We had a working capital deficit of $14.1 million and $8.4 million at March 31, 2018, and December 31, 2017, respectively. The change in working capital was primarily due to the termination of a prepaid hydraulic fracturing services agreement, which increased our working capital deficit by $4.3 million. Additionally, our working capital deficit increased due to an increase in accrued capital expenditures for the three months ended March 31, 2018. To the extent we operate with a working capital deficit, we expect such deficit to be offset by liquidity available under our revolving credit facility.

Cash Flows

The following table summarizes our sources and uses of funds for the periods noted (in thousands).

 

 

 

Three Months Ended

March 31,

 

 

 

2018

 

 

2017

 

Cash provided by operating activities

 

$

5,385

 

 

$

5,689

 

Cash used in investing activities

 

 

(5,387

)

 

 

(6,886

)

Cash provided by financing activities

 

 

3

 

 

 

1,255

 

Net increase in cash and cash equivalents

 

$

1

 

 

$

58

 

 

Operating Activities

Cash provided by operating activities decreased by 5%, or $0.3 million, to $5.4 million during the three months ended March 31, 2018, compared to the prior-year period. The decrease in our cash provided by operating activities was primarily due to an increase in LOE ($1.1 million), G&A ($0.7 million) and net cash settlements under our commodity derivatives ($0.6 million), partially offset by an increase in oil, NGLs and gas sales ($2.4 million) from higher commodity prices. We expect our operating cash flow to increase from prior year periods due to anticipated higher commodity prices. 

Investing Activities

Cash used in investing activities decreased by $1.5 million for the three months ended March 31, 2018, to $5.4 million, compared to the prior-year period. Cash used in investing activities for the three months ended March 31, 2018, was primarily attributable to drilling and development ($12.4 million) and infrastructure projects and equipment ($1.3 million).  Cash used in investing activities was partially offset by changes in working capital associated with investing activities ($8.3 million). The change in working capital associated with investing activities was primarily due to the termination of a prepaid hydraulic fracturing services agreement. During the three months ended March 31, 2018, we completed four horizontal wells. At March 31, 2018, we had six horizontal Wolfcamp wells waiting on completion.

20


 

Financing Activities

Cash provided by financing activities decreased $1.3 million for the three months ended March 31, 2018, compared to $1.3 million of cash provided by financing activities in the prior-year period. We had $292 million in outstanding borrowings under our revolving credit facility at March 31, 2018, compared to $291 million in outstanding borrowings as of December 31, 2017. During the three months ended March 31, 2018, net cash provided by financing activities included net borrowings under our revolving credit facility of $1 million, tax withholdings related to restricted stock of $0.6 million and changes in working capital associated with financing activities of $0.4 million.

Revolving Credit Facility

At March 31, 2018, the borrowing base and aggregate lender commitments under our revolving credit facility were $325 million, with maximum commitments from the lenders of $1 billion and a maturity date of May 7, 2020.  We had outstanding borrowings of $292 million and $291 million under our revolving credit facility at March 31, 2018, and December 31, 2017, respectively.  The weighted average interest rate applicable to borrowings under our revolving credit facility for the three months ended March 31, 2018, was 5.5%.

The borrowing base is redetermined semi-annually based upon a number of factors, including commodity prices and reserve levels. We or the lenders can each request one additional borrowing base redetermination each calendar year. Our semi-annual borrowing base redetermination was completed on May 1, 2018, and our borrowing base and aggregate lender commitments were reaffirmed at $325 million.

At March 31, 2018, we were in compliance with all of our covenants, and there were no existing defaults or events of default under our debt instruments. See Note 5 to our consolidated financial statements in this report for additional information regarding our revolving credit facility and our principal financial covenants.  To date, we have experienced no disruptions in our ability to access our revolving credit facility.  However, our lenders have substantial ability to reduce our borrowing base on the basis of subjective factors, including the loan collateral value that each lender, in its discretion and using the methodology, assumptions and discount rates as such lender customarily uses in evaluating oil and gas properties, assigns to our properties.

Senior Notes

At March 31, 2018, and December 31, 2017, $85.2 million of our 7% Senior Notes were outstanding. See Note 5 to our consolidated financial statements in this report for additional information regarding the Senior Notes.

Wilks, a related party, purchased a portion of our outstanding Senior Notes in the open market in 2017 and the first quarter of 2018. The Company believes that Wilks held approximately $60 million of our outstanding Senior Notes as of March 31, 2018. The Senior Notes held by Wilks are included in Senior Notes, net on our consolidated balance sheets. Our interest expense includes interest attributable to any Senior Notes held by Wilks on our consolidated statements of operations. On April 12, 2018, Wilks disclosed on Schedule 13D/A that they  intend to engage in discussions with the Company regarding their investment in the Company, including the possible acquisition of additional shares of common stock, through the exchange of additional 7% Senior Secured Notes due 2021 currently held by Wilks.  

Contractual Obligations

Our contractual obligations include long-term debt, operating lease obligations, asset retirement obligations and employment agreements with our executive officers. Since December 31, 2017, there have been no material changes to our contractual obligations.

Off-Balance Sheet Arrangements

From time to time, we enter into off-balance sheet arrangements and transactions that can give rise to off-balance sheet obligations. As of March 31, 2018, the off-balance sheet arrangements and transactions that we have entered into include undrawn letters of credit and operating lease agreements. We do not believe that these arrangements have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

General Trends and Outlook

Our financial results depend upon many factors, particularly the price of oil, NGLs and gas. Commodity prices are affected by changes in market demand, which is impacted by factors outside of our control, including domestic and foreign supply of oil, NGLs and gas, overall domestic and global economic conditions, commodity processing, gathering and transportation availability and the

21


 

availa bility of refining capacity, price and availability of alternative fuels, price and quantity of foreign imports, domestic and foreign governmental regulations, political conditions in or affecting other oil and gas producing countries, weather and technolo gical advances affecting oil, NGLs and gas consumption.  As a result, we cannot accurately predict future oil, NGLs and gas prices, and therefore, we cannot determine what effect increases or decreases will have on our capital program, production volumes a nd future revenues.   If the current oil or natural gas prices   decline from current levels, they   could   have a material adverse effect on our business, financial condition   and   results of operations and quantities of oil, natural gas and NGLs   reserves that ma y be economically produced and liquidity that may be accessed through our borrowing base under our revolving credit facility and through capital markets.

While we face the challenge of financing exploration, development and future acquisitions, we believe that we have adequate liquidity for current, near-term working capital needs and execution of our current development plan from cash generated from operations and unused borrowing capacity under our revolving credit facility. In addition, we may determine to use various financing sources, including the issuance of common stock, preferred stock, debt, convertible securities and other securities for future development of reserves, acquisitions, additional working capital or other liquidity needs, if such financing is available on acceptable terms.  We cannot guarantee that such financing will be available on acceptable terms or at all.  Using some of these financing sources may require approval from the lenders under our revolving credit facility.

In addition to production volumes and commodity prices, finding and developing sufficient amounts of oil and gas reserves at economical costs are critical to our long-term success. Future finding and development costs are subject to changes in the industry, including the costs of acquiring, drilling and completing our projects.  We focus our efforts on increasing oil and gas reserves and production while controlling costs at a level that is appropriate for long-term operations. As commodity prices improve, service costs in our industry may also increase. Our future cash flow from operations will depend on our ability to manage our overall cost structure.

Like all oil and gas production companies, we face the challenge of natural production declines. Oil and gas production from a given well naturally decreases over time. Additionally, our wells have a rapid initial production decline. We attempt to overcome this natural decline by drilling to develop and identify additional reserves, farm-ins or other joint drilling ventures, and by acquisitions. However, during times of severe price declines, we may from time to time reduce current capital expenditures and curtail drilling operations in order to preserve liquidity.  A material reduction in capital expenditures and drilling activities could materially reduce our production volumes and revenues.

We believe the outlook for our business is favorable despite the continued uncertainty of oil, NGLs and gas prices. Our resource base, adequate current liquidity, risk management, including commodity derivative strategy, and disciplined investment of capital provide us with an opportunity to exploit and develop our positions and maximize efficiency in our key operating area.  

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Some of the information below contains forward-looking statements. The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil, NGLs and gas prices, and other related factors. The disclosure is not meant to be a precise indicator of expected future losses, but rather an indicator of reasonably possible losses. This forward-looking information provides an indicator of how we view and manage our ongoing market risk exposures. Our market risk sensitive instruments were entered into for commodity derivative and investment purposes, not for trading purposes.

Commodity Price Risk

Given the current economic outlook, we expect commodity prices to remain volatile.  Even modest decreases in commodity prices can materially affect our revenues and cash flow.  In addition, if commodity prices remain low for a significant amount of time, we could be required under successful efforts accounting rules to write down our oil and gas properties.

In the three months ended March 31, 2018, the NYMEX WTI prompt month price ranged from a low of $59.19 per barrel to a high of $66.14 per barrel. In the three months ended March 31, 2017, the NYMEX WTI prompt month price ranged from a low of $47.34 per barrel to a high of $54.45 per barrel.

In the three months ended March 31, 2018, the NYMEX Henry Hub natural gas prompt month price ranged from a low of $2.55 per MMBtu to a high of $3.63 per MMBtu. In the three months ended March 31, 2017, the NYMEX Henry Hub natural gas prompt month price ranged from a low of $2.56 per MMBtu to a high of $3.72 per MMBtu.

22


 

The following table provide s our outstanding commodity derivative positions at March 31, 2018.

 

Commodity and Period

 

Contract

Type

 

Volume Transacted

 

Contract Price

Crude Oil

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

300 Bbls/day

 

$50.00/Bbl

April 2018 – June 2018

 

Collar

 

500 Bbls/day

 

$55.00/Bbl - $60.00/Bbl

April 2018 – September 2018

 

Swap

 

1,500 Bbls/day

 

$60.50/Bbl

 

 

 

 

 

 

 

Natural Gas

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200,000 MMBtu/month

 

$3.085/MMBtu

April 2018 – December 2018

 

Swap

 

250,000 MMBtu/month

 

$3.084/MMBtu

 

 

 

 

 

 

 

NGLs (C2 - Ethane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

1,000 Bbls/day

 

$11.424/Bbl

NGLs (C3 - Propane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

600 Bbls/day

 

$32.991/Bbl

NGLs (IC4 - Isobutane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

50 Bbls/day

 

$38.262/Bbl

NGLs (NC4 - Butane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$38.22/Bbl

NGLs (C5 - Pentane)

 

 

 

 

 

 

April 2018 – December 2018

 

Swap

 

200 Bbls/day

 

$56.364/Bbl

 

After March 31, 2018, we entered into swaps for the NYMEX Calendar Monthly Average Roll (the “CMA Roll”) covering 2,000 Bbls per day for May 2018 through December 2018 at $0.66/bbl. S waps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue.

We enter into financial swaps and options to reduce the risk of commodity price fluctuations. Derivative assets and liabilities on our commodity derivative contracts, at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Cash settlements under our commodity derivative contracts and changes in the fair value of our commodity derivative contracts are recorded in earnings as they occur and included in commodity derivative (loss) gain on our consolidated statements of operations for derivatives not designated as cash-flow hedges. We estimate the fair values of swap or collar contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets.

 

At March 31, 2018, the fair value of our open derivative contracts was a net liability of $1.2 million, compared to a net liability of $0.8 million at December 31, 2017.

We are exposed to credit losses in the event of nonperformance by counterparties on our commodity derivative positions. We do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions; however, we cannot be certain that we will not experience such losses in the future.  All of the counterparties to our commodity derivative positions are participants in our revolving credit facility, and the collateral for the outstanding borrowings under our revolving credit facility is used as collateral for our commodity derivatives.

For the three months ended March 31, 2018 and 2017, we recognized a commodity derivative loss of $1.9 million and a commodity derivative gain of $3.4 million.  A hypothetical 10% increase in commodity prices would have resulted in a $5 million decrease in the fair value of our commodity derivative positions recorded on our balance sheet at March 31, 2018, and a corresponding increase in the commodity derivatives loss recorded on our consolidated statement of operations for the three months ended March 31, 2018.

23


 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such controls include those designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including the Chairman and Chief Executive Officer (“CEO”), and the Executive Vice President and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of March 31, 2018. Based on this evaluation, the CEO and CFO have concluded that, as of March 31, 2018, our disclosure controls and procedures were effective, in that they ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting

There were no changes made in our internal control over financial reporting (as defined in Rule 13a-15(f) promulgated under the Exchange Act) during the three months ended March 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations Inherent in All Controls

Our management, including the CEO and CFO, recognizes that the disclosure controls and procedures and internal controls (discussed above) cannot prevent all errors or all attempts at fraud. Any controls system, no matter how well-crafted and operated, can only provide reasonable, and not absolute, assurance of achieving the desired control objectives. Because of the inherent limitations in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected.

 

 

24


 

PART II―OTHER INFORMATION

Item 1. Legal Proceedings.

There have been no material developments in the legal proceedings described in Part I, Item 3. “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 9, 2018.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the risks discussed in the following report that we have filed with the SEC, which risks could materially affect our business, financial condition and results of operations: Annual Report on Form 10-K for the year ended December 31, 2017, under the headings Item 1. “Business – Markets and Customers; Competition; and Regulation,” Item 1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 7A. “Quantitative and Qualitative Disclosures about Market Risk” filed with the SEC on March 9, 2018.

There have been no material changes to the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 9, 2018, which is accessible on the SEC’s website at www.sec.gov and our website at www.approachresources.com.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table provides information relating to our purchase of shares of our common stock during the three months ended March 31, 2018.  The repurchases reflect shares withheld upon vesting of restricted stock under our 2007 Stock Incentive Plan to satisfy statutory minimum tax withholding obligations.

ISSUER PURCHASES OF EQUITY SECURITIES

 

Period

 

(a)

Total

Number of

Shares

Purchased

 

 

(b)

Average

Price Paid

Per Share

 

 

(c)

Total Number of

Shares

Purchased as

Part of Publicly Announced

Plans or

Programs

 

 

(d)

Maximum

Number of Shares

that May Yet Be

Purchased Under

the Plans or

Programs

 

January 1, 2018 – January 31, 2018

 

 

60,340

 

 

$

3.46

 

 

 

 

 

 

 

February 1, 2018 – February 28, 2018

 

 

 

 

 

 

 

 

 

 

 

 

March 1, 2018 – March 31, 2018

 

 

129,486

 

 

 

3.05

 

 

 

 

 

 

 

Total

 

189,826

 

 

$

3.18

 

 

 

 

 

 

 

 

Item 6. Exhibits.

The following documents are filed as exhibits to this report.

 

Exhibit Number

 

Exhibit title

 

 

 

3.1

 

Certificate of Amendment of Restated Certificate of Incorporation of Approach Resources Inc. (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed March 10, 2017, and incorporated herein by reference).

 

 

 

3.2

 

Restated Certificate of Incorporation of Approach Resources Inc. (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed December 13, 2007, and incorporated herein by reference).

 

 

 

3.3

 

Second Amended and Restated Bylaws of Approach Resources Inc. (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed November 8, 2013, and incorporated herein by reference).

 

 

 

4.1

 

Specimen Common Stock Certificate (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A filed October 18, 2007 (File No. 333-144512), and incorporated herein by reference).

25


 

Exhibit Number

 

Exhibit title

 

 

 

 

 

 

4.2

 

Second Supplemental Indenture, dated as of December 20, 2016, by and among Approach Resources Inc., the guarantors named therein and Wilmington Trust, National Association, as successor trustee under the Indenture (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed December 22, 2016, and incorporated herein by reference).

 

 

 

4.3

 

First Supplemental Indenture, dated as of June 11, 2013, among Approach Resources Inc., as issuer, the subsidiary guarantors named therein, as guarantors, and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed June 11, 2013, and incorporated herein by reference).

 

 

 

4.4

 

Senior Indenture, dated as of June 11, 2013, among Approach Resources Inc., as issuer, the subsidiary guarantors named therein, as guarantors, and Wells Fargo Bank, National Association, as trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 11, 2013, and incorporated herein by reference).

 

 

 

4.5

 

Agreement dated as of April 28, 2016, by and among Approach Resources, Inc., Wells Fargo Bank, National Association, and Wilmington Trust, National Association (filed as Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q filed August 4, 2016, and incorporated herein by reference).

 

 

 

4.6

 

Registration Rights Agreement, dated as of January 27, 2017, by and among Approach Resources Inc., Wilks Brothers, LLC and SDW Investments, LLC (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K filed January 30, 2017, and incorporated herein by reference).

 

 

 

4.7

 

Registration Rights Agreement, dated as of November 14, 2007, by and among Approach Resources Inc. and investors identified therein (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed December 3, 2007, and incorporated herein by reference).

 

 

 

4.8

 

Registration Rights Agreement, dated as of November 20, 2017, by and among Approach Resources Inc. and Amistad Energy Partners, LLC (filed as Exhibit 4.8 to the Company’s Annual Report on Form 10-K filed March 9, 2018, and incorporated herein by reference).

 

 

 

*10.1

 

Second Revised Form of TSR-Based Restricted Stock Award Agreement under Approach Resources Inc. 2007 Stock Incentive Plan.

 

 

 

*10.2

 

Revised Form of Cash Settled Performance Share Unit Award Agreement under Approach Resources Inc. 2007 Stock Incentive Plan.

 

 

 

*31.1

 

Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*31.2

 

Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

*32.1

 

Certification by the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

*32.2

 

Certification by the Chief Financial Officer Pursuant to U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

*101.INS

 

XBRL Instance Document.

 

 

 

*101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

*101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

*101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

*101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

*101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

*

Filed herewith.

Denotes management contract or compensatory plan or arrangement.

 

 

 

26


 

SIGNAT URES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Approach Resources Inc.

 

 

 

 

Date: May 3, 2018

By:

 

/s/ J. Ross Craft

 

 

 

J. Ross Craft

 

 

 

Chairman of the Board and Chief Executive Officer  

(Principal Executive Officer)

 

Date: May 3, 2018

By:

 

/s/ Sergei Krylov

 

 

 

Sergei Krylov

 

 

 

Executive Vice President and Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

Exhibit 10.1

APPROACH RESOURCES INC.
2007 STOCK INCENTIVE PLAN

20[__] RESTRICTED STOCK AWARD AGREEMENT

TSR VESTING REQUIREMENTS

THIS AGREEMENT, made and entered into as of [__] , 20[__] , by and between Approach Resources Inc., a Delaware corporation (“ Approach ”), and [__] , an employee, outside director or other individual providing services to Approach or one of its Affiliates (“ Participant ”).

WHEREAS, the Compensation Committee of Approach’s Board of Directors or such other committee designated by Approach’s Board of Directors (the “ Committee ”), acting under Approach’s 2007 Stock Incentive Plan, as amended (the “ Plan ”), has the authority to award restricted shares (including the Target Restricted Shares and Maximum Restricted Shares each as defined herein, the “ Restricted Shares ”) of Approach’s common stock, $0.01 par value per share (the “ Common Stock ”), to employees, outside directors or other individuals providing services to Approach or an Affiliate;

WHEREAS, pursuant to the Plan, the Committee has determined to make such an award to Participant on the terms and conditions and subject to the restrictions set forth in the Plan and this Agreement, and Participant desires to accept such award; and

WHEREAS, a copy of the Plan has been made available to Participant and shall be deemed a part of this Agreement as if fully set forth herein and the terms capitalized but not defined herein shall have the meanings set forth in the Plan.

NOW, THERFORE, in consideration of the premises and mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. TSR Restricted Stock Award .  On the terms and conditions and subject to the restrictions, including forfeiture, hereinafter set forth, Approach hereby awards to Participant, and Participant hereby accepts, a restricted stock award (the “ Award ”) with respect to a target number of [__] ([__]) shares (the “ Target Restricted Shares ”) of Common Stock; provided, that, based on the relative achievement of the TSR Vesting Objective (as defined in this Agreement) and the other terms and conditions herein, the number of Restricted Shares that may ultimately become free of restrictions hereunder may range from 0% to 150% of the Target Restricted Shares (such number of Restricted Shares that equal 150% of the Target Restricted Shares, or [__] ([__]) Restricted Shares, shall hereinafter be referred to as the “ Maximum Restricted Shares ”).  The Award is made on [__] , 20[__] (the “ Grant Date ”).  On the Grant Date, a number of Restricted Shares equal to the Maximum Restricted Shares shall be issued to Participant.  A certificate representing the Maximum Restricted Shares shall be issued in the name of Participant (or, at the option of Approach, in the name of a nominee of Approach) as of the Grant Date and delivered to Participant on the Grant Date or as soon thereafter as is practicable.  Participant shall cause the certificate representing the Maximum Restricted Shares, upon receipt thereof by Participant, to be deposited, together with stock powers and any other instrument of transfer reasonably requested by Approach duly endorsed in blank, with Approach, to be held by Approach in escrow for Participant’s benefit until such time as the Maximum Restricted Shares represented by such certificate are either forfeited by Participant to Approach or the restrictions thereon terminate as set forth in this Agreement.

2. Vesting and Forfeiture .  The Restricted Shares shall be subject to a performance period that shall commence on [__] and shall end on [__] (the “ Performance Period ”), subject to (i) the Committee’s certification of the level of achievement of the TSR Vesting Objective outlined in Section 2(a) below, and (ii) except as otherwise provided in Section 2(b) or 2(c) , Participant’s continuous active service with Approach or an Affiliate through the end of the Performance Period (the “ Continuous Service Requirement ”).  During the Performance Period, the Maximum Restricted Shares shall be subject to being forfeited by Participant to Approach as provided in this Agreement, and Participant may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of any of the Maximum Restricted Shares (the “ Restrictions ”).

 

 


 

(a) TSR Vesting Objective .  The “ TSR Vesting Objective ” means Approach’s relative ranking in respect of the Performance Period with regard to Total Shareholder Return (as defined in Appendix A attached hereto) as compared to Total Shareholder Return of the Peer Companies (as defined in Appendix A ), and the level of achievement of the TSR Vesting Objective shall be determined in accordance with Appendix A .  After the end of the Performance Period (but no later than March 15 , 20 [__] ) , the Committee will determine Approach’s Total Shareholder Return as compared to Total Shareholder Return of the Peer Companies and will certify the level of achievement with respect to the TSR Vesting Objective and what percentage of the Target Restricted Shares has been earned in accordance with the table set forth in Appendix A (such number of Restricted Shares that become earned shall hereinafter be called the “ Earned Restricted Shares ”), subject to Participant’s satisfaction of the Continuous Service Requirement; provided, that, if Approach’s absolute Total Shareholder Return for the Performance Period is negative, the number of Earned Restricted Shares shall not exceed the Target Restricted Shares.  Any fractional Earned Restricted Shares shall be rounded up to the nearest whole share of Common Stock. The Committee shall have the sole discretion for determining the level of achievement with respect to the TSR Vesting Objective and the number of Earned Restricted Shares, and any such determinations shall be conclusive.  If the Committee determines that less than the total number of Maximum Restricted Shares has become Earned Restricted Shares, (i) the Participant shall have no rights whatsoever in and to any of the Maximum Restricted Shares that have not become Earned Restricted Shares, (ii) all of the Maximum Restricted Shares that have not become Earned Restricted Shares shall automatically revert to Approach at no cost and (iii) neither the Participant nor any of his or her heirs, beneficiaries, executors, administrators or other personal representatives shall have any rights with respect to any Maximum Restricted Shares that have not become Earned Restricted Shares.  Following the removal of the Restrictions on any Earned Restricted Shares, Approach shall, as soon as administratively feasible, deliver to Participant from escrow a certificate representing such shares of Common Stock and Participant shall be free to sell, transfer, pledge, exchange, hypothecate or otherwise dispose of such shares of Common Stock, subject to applicable securities laws and the policies of Approach then in effect.

(b) Termination of Employment .

(i) Termination Generally .  Subject to Section 2(b)(ii) and Section 2(c) , upon termination of Participant’s employment or service with Approach or an Affiliate prior to the end of the Performance Period, (A) the Participant shall have no rights whatsoever in and to any of the Maximum Restricted Shares, (B) all of the Maximum Restricted Shares shall automatically revert to Approach at no cost, and (C)  neither Participant nor any of his or her heirs, beneficiaries, executors, administrators or other personal representatives shall have any rights with respect thereto.

(ii) Termination for Death or Disability .  If Participant’s employment or service with Approach or an Affiliate is terminated prior to the end of the Performance Period as a result of the Participant’s death or Disability (as defined in the Plan), then the Restrictions on a number of Restricted Shares equal to the Target Restricted Shares shall automatically lapse at the time of such termination of employment or service and such number of Target Restricted Shares shall be deemed to be Earned Restricted Shares.  Following the removal of the Restrictions on the Earned Restricted Shares as of the time of termination, Approach shall, as soon as administratively feasible, deliver to Participant from escrow a certificate representing such shares of Common Stock and Participant shall be free to sell, transfer, pledge, exchange, hypothecate or otherwise dispose of such shares of Common Stock, subject to applicable securities laws and the policies of Approach then in effect.

(c) Change of Control .  Notwithstanding the Change of Control provisions in Article XIII of the Plan or any provision hereof to the contrary, if a Change of Control (as defined in the Plan) occurs prior to the end of the Performance Period (the date of such occurrence, the “ Change of Control Date ”) and Participant has remained in continuous service with Approach or an Affiliate through the Change of Control Date, then, upon the occurrence of such Change of Control, Participant shall be deemed to have earned a number of the Restricted Shares equal to the number of Earned Restricted Shares the Participant would have earned in

2

 

 


 

accordance with Section 2(a) , but assuming that (i) the Performance Period ended on the Change of Control Date, and (ii) the determination of whether, and to what extent, the TSR Vesting Objective is achieved shall be based on actual performance against the stated criteria through the Change of Control Date (and the Committee shall certify the level of such achievement no later than 60 days following the Change of Control Date) .  Following the removal of the Restrictions on the Earned Restricted Shares as of the Change of Control Date, Approach shall, as soon as administratively feasible, deliver to Participant from escrow a certificate representing such shares of Common Stock and Participant shall be free to sell, transfer, pledge, exchange, hypothecate or otherwise dispose of such shares of Common Stock, subject to applicable securities laws and the policies of Approach then in effect.

3. Rights as Stockholder .  Subject to the provisions of this Agreement, upon the issuance of a certificate or certificates representing the Maximum Restricted Shares to Participant, Participant shall become the record and beneficial owner thereof for all purposes and shall have all rights as a stockholder, including without limitation voting rights and the right to receive dividends and distributions (provided that any such dividend or distribution shall be paid no later than the 15th day of the third month of the calendar year following the calendar year in which the dividend or distribution is declared by Approach), with respect to the Maximum Restricted Shares.  If and to the extent Approach shall effect a stock split, stock dividend or similar distribution with respect to the Common Stock, (a) the stock distributed pursuant thereto shall be held by Approach with respect to those Maximum Restricted Shares as to which the Restrictions have not yet been removed pursuant to Section 2 ; (b) such additional stock shall enjoy the privileges and be subject to the Restrictions applicable to the Maximum Restricted Shares; and (c) Participant shall be entitled to sell, transfer, pledge, exchange, hypothecate or otherwise dispose of such additional stock when and to the extent the Restrictions on the Maximum Restricted Shares to which the distribution relates have been removed pursuant to Section 2 .

4. Optional Issuance in Book-Entry Form .  Notwithstanding the foregoing, at the option of Approach, any shares of Common Stock that under the terms of this Agreement are issuable in the form of a stock certificate may instead be issued in book-entry form.

5. Withholding Taxes .  

(a) Participant may elect, within 30 days of the Grant Date and on notice to Approach and the Internal Revenue Service in accordance with Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations and other guidance thereunder, to realize income for federal income tax purposes equal to the fair market value of the Maximum Restricted Shares on the Grant Date.  In such event, Participant shall make arrangements satisfactory to Approach or the appropriate Affiliate to pay in the calendar year that includes the Grant Date any federal, state or local taxes required to be withheld with respect to such shares.

(b) If no election is made by Participant pursuant to Section 5(a) hereof, then upon the termination of the Restrictions applicable hereunder to all or any portion of the Restricted Shares, Participant (or in the event of Participant’s death, the administrator or executor of Participant’s estate) will pay to Approach or the appropriate Affiliate, or make arrangements satisfactory to Approach or such Affiliate regarding payment of, any federal, state or local taxes of any kind required by law to be withheld with respect to the Earned Restricted Shares with respect to which such Restrictions have terminated.  Approach may allow the Participant to pay the amount of such taxes required by law to be withheld with respect to the Earned Restricted Shares by (i) withholding shares of Common Stock from any issuance of Common Stock due as a result of the removal of the Restrictions on any Restricted Shares, or (ii) permitting the Participant to deliver to Approach previously acquired shares of Common Stock, in each case having an aggregate Fair Market Value on the date of calculation equal to the amount of such required withholding taxes.

(c) Any provision of this Agreement to the contrary notwithstanding, if Participant does not satisfy his or her obligations under paragraphs (a) or (b) of this Section 5 , Approach shall, to the extent permitted by law, have the right to deduct from any payments made under the Plan, regardless of the form of such payment, or from any other compensation payable to Participant, whether or not pursuant to this

3

 

 


 

Agreement or the Plan and regardless of the form of payment, any federal, state or local taxes of any kind required by law to be withheld with respect to the Restricted Shares.

6. Reclassification of Shares .  In the event of any reorganization, recapitalization, stock split, stock dividend, merger, consolidation, combination of shares or other change affecting the Common Stock, the Committee shall make adjustments in accordance with the Plan.  Any such adjustments made by the Committee shall be conclusive.

7. Effect on Employment .  Nothing contained in this Agreement shall confer upon Participant the right to continue in the employment of Approach or any Affiliate, or affect any right which Approach or any Affiliate may have to terminate the employment of Participant.  This shall not be construed as any agreement or understanding, express or implied, that Approach or any Affiliate will retain Participant as an employee for any period of time or at any particular rate of compensation or other terms and conditions of employment unrelated to Restricted Shares.

8. Investment Representations .  

(a) The shares are being received for Participant’s own account with the intent of holding them and without the intent of participating, directly or indirectly, in a distribution of such shares and not with a view to distribute, or for resale in connection with any distribution of, such shares or any portion thereof.

(b) A legend may be placed on any certificate(s) or other document(s) delivered to Participant or substitute therefore indicating restrictions on transferability of the shares pursuant to this Agreement or referring to any stop transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission, NASDAQ or any other stock exchange or association upon which the Common Stock of Approach is then listed or quoted, any applicable federal or state securities laws, and any applicable corporate law, and any transfer agent of Approach shall be instructed to require compliance therewith.

9. Assignment .  Approach may assign all or any portion of its rights and obligations under this Agreement.  The Award, the Restricted Shares and the rights and obligations of Participant under this Agreement may not be assigned, sold, transferred, pledged, exchanged, hypothecated or otherwise disposed of by Participant other than by will or the applicable laws of descent and distribution.

10. Binding Effect .  This Agreement shall be binding upon and inure to the benefit of (a) Approach and its successors and assigns, and (b) Participant and his or her heirs, devisees, executors, administrators and personal representatives.

11. Notices .  All notices between the parties hereto shall be in writing and given in the manner provided in Section 15.7 of the Plan.  Notices to Participant shall be given to Participant’s address as contained in Approach’s records.  Notices to Approach shall be addressed to the Corporate Secretary at the principal executive offices of Approach as set forth in Section 15.7 of the Plan.

12. Governing Law; Exclusive Forum; Consent to Jurisdiction .  This Agreement shall be governed by the laws of the State of Delaware except for its laws with respect to conflict of laws.  The exclusive forum for any lawsuit arising from or related to this Agreement shall be a state or federal court in Tarrant County, Texas.  This provision does not prevent Approach from removing to an appropriate federal court any action brought in state court.  NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS PROHIBITING REMOVAL TO FEDERAL COURT BY APPROACH OF ANY ACTION BROUGHT AGAINST IT BY PARTICIPANT.

13. Execution of Receipts and Releases .  Any issuance or transfer of the Restricted Shares to Participant or Participant’s legal representative, heir, legatee or distributee, in accordance with the provisions of

4

 

 


 

this Agreement, shall be in full satisfaction of all claims of such persons hereunder related to the Award.  Approach may require Participant or Participant’s legal representative, heir, legatee or distributee, as a condition precedent to such issuance, to execute such a release and receipt therefore in such form as Approach may determine.

14. Severability .  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

15. Headings .  The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.

16. Amendment .  The Committee may amend the terms of this Award and this Agreement at any time, although no such amendment shall adversely affect, in any material way, the Participant’s (or a Participant’s Permitted Transferee’s) rights under an outstanding Award without the prior consent of the Participant (or the Participant’s Permitted Transferee) then holding the Award.

17. Entire Agreement .  This Agreement constitutes the entire agreement between the parties concerning its subject matter and supersedes all prior agreements, understandings, and statements, both written and oral, between the parties with respect to such subject matter.  In signing this Agreement, the Participant is not relying on any written or oral statement, promise, or representation from Approach or its Affiliates concerning this Agreement other than as set above in this Agreement.

18. Miscellaneous . Notwithstanding anything to the contrary in this Agreement, Approach will not be required to comply with any term, covenant or condition of this Agreement if and to the extent prohibited by applicable law. Participant shall reimburse Approach for incentive-based or equity-based compensation and profits realized from the sale of the Restricted Shares covered by this Agreement as required by applicable law, including, but not limited to, Section 304 of the Sarbanes-Oxley Act of 2002 and Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and agrees that Approach need not comply with any term, covenant or condition of this Agreement to the extent that doing so would require that Participant reimburse Approach for such amounts pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and/or Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

 

IN WITNESS WHEREOF, Approach and Participant have executed this Agreement as of the date first written above.

 

Approach Resources Inc.

 

 

 

By:

 

 

Name:

 

[__]

Title:

 

[__]

 

 

 

PARTICIPANT

 

 

 

By:

 

 

Name:

 

[__]

 

5

 

 


 

STOCK POWER AND ASSIGNMENT

SEPARATE FROM CERTIFICATE

FOR VALUE RECEIVED and pursuant to that certain Approach Resources Inc. 2007 Stock Incentive Plan and the Restricted Stock Award Agreement dated [_], 20[__] (the “ Agreement ”), the undersigned Participant hereby sells, assigns and transfers unto Approach Resources Inc., [__] shares of Common Stock, $0.01 par value per share, of Approach Resources Inc., a Delaware corporation (“ Approach ”), standing in the undersigned’s name on the books of Approach and does hereby irrevocably constitute and appoint the Corporate Secretary of Approach as the undersigned’s attorney-in-fact, with full power of substitution, to transfer said stock on the books of Approach.  THIS ASSIGNMENT MAY ONLY BE USED AS AUTHORIZED BY THE AGREEMENT AND ANY EXHIBITS THERETO.

 

Dated:  _________________________

 

 

PARTICIPANT

 

 

 

By:

 

 

Name:

 

[__]

 

 

6

 

 


 

APPENDIX A

TO RESTRICTED STOCK AWARD AGREEMENT

 

Total Shareholder Return Vesting Objective

 

The TSR Vesting Objective for the Restricted Shares is outlined in this Appendix A below.  The “ TSR Vesting Objective ” means Approach’s relative ranking in respect of the Performance Period with regard to Total Shareholder Return as compared to Total Shareholder Return of the Peer Companies. The Committee shall have the sole discretion for determining the level of achievement with respect to the TSR Vesting Objective and the number of Earned Restricted Shares, and any such determinations shall be conclusive.

1.

Defined Terms .  

(a)“ Total Shareholder Return ” means, as to Approach and each of the Peer Companies, the annualized rate of return shareholders receive through stock price changes and the assumed reinvestment of dividends paid over the Performance Period.  Dividends per share paid other than in the form of cash shall have a value equal to the amount of such dividends reported by the issuer to its shareholders for purposes of Federal income taxation.  For purposes of determining the Total Shareholder Return for Approach and each of the Peer Companies the change in the price of Approach’s Common Stock and of the common stock of each Peer Company, as the case may be, shall be based upon the average of the closing stock prices of Approach and each such Peer Company on each trading day in the 30-day period preceding each of the start (“ Initial Value ”) and the end (“ Closing Value ”) of the Performance Period.    

(b)“ Peer Company ” means a company that (i) has a class of common equity securities listed to trade on a national securities exchange which is registered with the Commission under Section 6 of the Exchange Act of 1934, as amended (the “ Exchange Act ”), and registered under Section 12 of the Exchange Act, during each day of the Performance Period, and (ii) is one of the following companies:

[“Peer Companies” to be selected by the Committee and will consist of companies from the oil and gas industry that closely resemble the Company in size, scope and nature of business operations, production and reserve base and areas of operation.]

If a Peer Company ceases to qualify as a Peer Company at any time during the Performance Period due to or following its bankruptcy or de-listing due to failure to meet minimum listing standards, such company shall remain a Peer Company with its Total Shareholder Return automatically deemed to occupy the lowest available rank (i.e., if a Peer Company has been de-listed due to failure to meet minimum listing standards, or has filed bankruptcy, then any subsequent Peer Company to be de-listed or to file bankruptcy will occupy the next to lowest rank) among the Peer Companies for the Performance Period. In addition, if and solely to the extent that at the end of the Performance Period one or more of the [__] companies listed above fails to qualify as a “Peer Company” for reasons other than bankruptcy or de-listing due to failure to meet minimum listing standards (such as a merger or going-private transaction), then such number of alternate companies (as the Committee may, in their discretion, select) as is necessary to have [__] Peer Companies may be treated as Peer Companies for the entire Performance Period, provided that each such alternate company satisfies the definition of Peer Company.  

 

If, after adding all eligible alternate companies (or if the Committee does not select alternate Peer Companies), the number of companies qualifying as Peer Companies for the Performance Period is less than [__] , the percentage of the Target Restricted Shares earned shall be determined in a manner consistent with (a) the requirements to qualify the Restricted Shares as performance-based compensation exempt from the limitations imposed by Section 162(m) of the Internal Revenue Code of 1986, as amended, and (b) the following general guidelines for determining the number of Earned Restricted Shares:

 

[Number of Earned Restricted Shares earned if less than full number of Peer Companies remain at the end of the Performance Period to be determined based on the number of Peer Companies selected by the Committee at the beginning of the Performance Period.]

 

 


 

(c) Performance Period ” means the three year period commencing on [__] and ending on [__] .  

 

2. Calculation of Ranking; Earned Restricted Shares .  After the end of the Performance Period, the Committee will determine Approach’s Total Shareholder Return as compared to Total Shareholder Return of the Peer Companies and will certify the level of achievement with respect to the TSR Vesting Objective and the number of Earned Restricted Shares in accordance with the following table:

 

[Table to be determined based on the number of Peer Companies.]

 

Notwithstanding the foregoing, (a) if Approach’s absolute Total Shareholder Return for the Performance Period is negative, the number of Earned Restricted Shares shall not exceed the Target Restricted Shares, and (b) no Restricted Shares will become Earned Restricted Shares unless Participant also satisfies the Continuous Service Requirement in accordance with the terms of the Agreement.  

A-2

 

Exhibit 10.2

APPROACH RESOURCES INC.
2007 STOCK INCENTIVE PLAN

20[_] CASH-SETTLED PERFORMANCE SHARE UNIT AWARD AGREEMENT

PERFORMANCE VESTING AND TIME VESTING REQUIREMENTS

THIS 20[__] CASH-SETTLED PERFORMANCE SHARE UNIT AWARD AGREEMENT (the “ Agreement ”) is made and entered into as of the [__] day of [__] , 20 [__] , by and between Approach Resources Inc., a Delaware corporation (“ Approach ”), and [__] , an employee, outside director or other individual providing services to Approach or one of its Affiliates (“ Participant ”).

WHEREAS, the Compensation Committee of Approach’s Board of Directors or such other committee designated by Approach’s Board of Directors (the “ Committee ”), acting under Approach’s 2007 Stock Incentive Plan, as amended (the “ Plan ”), has the authority to grant Performance Awards denominated in shares of Approach’s common stock, $0.01 par value per share (the “ Common Stock ”), to employees, outside directors or other individuals providing services to Approach or an Affiliate;

WHEREAS, pursuant to the Plan, the Committee has determined to make such an award to Participant on the terms and conditions and subject to the restrictions set forth in the Plan and this Agreement, and Participant desires to accept such award; and

WHEREAS, a copy of the Plan has been made available to Participant and shall be deemed a part of this Agreement as if fully set forth herein and the terms capitalized but not defined herein shall have the meanings set forth in the Plan.

NOW, THERFORE, in consideration of the premises and mutual covenants and agreements contained herein, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:

1. Performance Share Unit Award .  On the terms and conditions and subject to the restrictions, including forfeiture, hereinafter set forth, Approach hereby awards to Participant, and Participant hereby accepts, a Performance Award (the “ Award ”) of [__] ( [__] ) performance units (each a “ Performance Unit ”).  The Award is made on [__], 20[__] (the “ Grant Date ”).  Each Performance Unit represents a contractual right to receive an amount of cash equal to the 30-Day Volume-Weighted Average Stock Price, subject to the terms and conditions of this Agreement; provided that in no event shall the aggregate cash received in settlement of Performance Units  granted under this Agreement exceed $5,000,000 in any fiscal year.  Participant’s right to receive a cash settlement in respect of Performance Units is generally contingent, in whole or in part, upon, except as otherwise provided in Section 2(c) , (a) the achievement of the Performance Vesting Requirement outlined in Section 2(a)(i) below, and (b) Participant’s satisfaction of the Time Vesting Requirement outlined in Section 2(a)(ii) below.  The Performance Units contemplated herein are described in the Plan as Performance Awards payable in cash pursuant to Article XI of the Plan. For purposes of this Agreement, the “ 30-Day Volume-Weighted Average Stock Price ” means, in respect of any vesting date, the volume-weighted average closing price of a share of the Common Stock as reported on the NASDAQ Global Select Market (or such other exchange on which the Common Stock is listed) for the 30 consecutive full trading days ending at the close of regular hours trading on the NASDAQ Global Select Market on the full trading day immediately preceding such vesting date.

2. Vesting and Forfeiture .  

(a) Vesting Restrictions .  The Performance Units shall be subject to a restricted period that shall commence on the Grant Date and shall end on the time-based vesting dates described in Section 2(a)(ii) below (the “ Performance Period ”), subject to the satisfaction of the Performance Vesting Requirement described in Section 2(a)(i) and the provisions of Section 2(c) .  During the Performance Period, the Performance Units shall be subject to being forfeited by Participant to Approach as provided in this Agreement, and

1

 

 


 

Participant may not sell, transfer, pledge, exchange, hypothecate or otherwise dispose of any of the Performance Units (the “ Restrictions ”).

(i) Performance Vesting Requirement .  The “ Performance Vesting Requirement ” means the performance-based vesting Restrictions for the Performance Units.  The Performance Vesting Requirement shall be satisfied by the achievement of the “ Performance Goal ,” which is performance criteria established by the Committee pursuant to Article XI of the Plan and set forth in Appendix A attached hereto.  Within 75 days after the end of the 20[__] calendar year, the Committee will review and analyze Approach’s performance for the 20[__] calendar year and determine whether the Performance Vesting Requirement has been satisfied.  If the Committee determines that the Performance Vesting Requirement has been satisfied, the Committee will certify the achievement of the Performance Goal for the 20 [__] calendar year and then the Time Vesting Requirement in Section 2(a)(ii) below will be the remaining Restriction applicable to the Performance Units; for the avoidance of doubt, except as provided in Section 2(c) , no Performance Units shall become vested and no payments with respect to Performance Units shall be made prior to satisfaction of the Time Vesting Requirement applicable to such Performance Units.  If the Committee determines that the Performance Vesting Requirement has not been satisfied, (i) the Participant shall have no rights whatsoever in and to any cash settlement in respect of any of the Performance Units, (ii) all of the Performance Units shall automatically revert to Approach at no cost and (iii) neither the Participant nor any of his or her heirs, beneficiaries, executors, administrators or other personal representatives shall have any rights with respect thereto.  The Committee’s certification of the achievement of the Performance Goal will be effective as of [__] , 20 [__] , regardless of any delay in the Committee’s determination of whether the Performance Goal was satisfied for the 20 [__] calendar year.  The Committee shall have the sole discretion for determining whether the Performance Vesting Requirement has been satisfied and any such determination shall be conclusive.  

(ii) Time Vesting Requirement .  The “ Time Vesting Requirement ” means the time-based vesting Restrictions for the Performance Units during the Performance Period. Provided the Committee certifies that the Performance Vesting Requirement has been satisfied, the time-based Restrictions on the Performance Units shall lapse and the Performance Units shall become vested as to:

(A) 33.33% of the Performance Units (if a fractional number, then the next lower whole number) on [__] , provided Participant is in the continuous active service of Approach or an Affiliate until such date;

(B) 33.33% of the Performance Units (if a fractional number, then the next lower whole number) on [__] , provided Participant is in the continuous active service of Approach or an Affiliate until such date; and

(C) the remaining Performance Units on [__] , provided Participant is in the continuous active service of Approach or an Affiliate until such date.

(b) Termination Generally .  Subject to Section 2(c) , upon termination of Participant’s employment or service with Approach or an Affiliate, (i) Participant shall have no rights whatsoever in and to any cash settlement in respect of any of the Performance Units as to which the Restrictions have not lapsed pursuant to Section 2(a) as of the date of the Participant’s termination of employment or service, (ii) all of the Performance Units as to which the Restrictions have not lapsed pursuant to Section 2(a) as of the date of the Participant’s termination of employment or service shall automatically revert to Approach at no cost and (iii) neither Participant nor any of his or her heirs, beneficiaries, executors, administrators or other personal representatives shall have any rights with respect thereto.

(c) Change of Control and Termination of Employment or Service for Death or Disability .  

2

 

 


 

(i) Change of Control . In the event Participant is in the continuous active service of Approach or an Affiliate from the Grant Date until the occurrence of a Change of Control, then, upon the occurrence of such Change of Control, any remaining Restrictions on the Performance Units shall automatically lapse in full as to any outstanding Performance Units the Participant may hold at the time of such Change of Control, with any remaining Restrictions imposed upon the Performance Units as a result of the Performance Vesting Requirement deemed satisfied at the “maximum” levels necessary to satisfy the Performance Vesting Requirement at the time of the Change of Control.  

(ii) Termination of Employment or Service for Death or Disability .  If Participant’s employment or service relationship with Approach or an Affiliate is terminated as a result of the Participant’s death or Disability, then, upon such termination, any remaining Restrictions on the Performance Units shall automatically lapse in full as to any outstanding Performance Units the Participant may hold at the time of such a termination of employment or service, with any remaining Restrictions imposed upon the Performance Units as a result of the Performance Vesting Requirement deemed satisfied at the “maximum” levels necessary to satisfy the Performance Vesting Requirement at the time of the Participant’s termination of employment or service as a result of the Participant’s death or Disability.

3. Payment in Settlement of Vested Performance Units .  Following the lapse of the Restrictions on any Performance Units pursuant to both the Performance Vesting Requirement and the Time Vesting Requirement in accordance with Section 2(a) or 2(c) , as applicable, Approach shall, as soon as administratively feasible, but not later than 15 days following the date such Restrictions lapse and the Performance Units become vested, pay to Participant a cash payment equal to the 30-Day Volume-Weighted Average Stock Price, multiplied by the number of Performance Units becoming vested; provided that in no event shall the aggregate cash received in settlement of Performance Units  granted under this Agreement exceed $5,000,000 in any fiscal year.  Upon settlement of vested Performance Units in cash, such Performance Units shall be canceled and terminated.

4. No Rights as Stockholder; Dividend Equivalents .  Participant shall have no rights as a stockholder of the Company with respect to the Performance Units; provided that, (a) Participant shall have cash dividend equivalent rights with respect to a number of shares of Common Stock equal to the number of outstanding Performance Units then held by Participant (the “ Underlying Shares ”), with any cash dividends attributable thereto paid to Participant at the time cash dividends are paid to Approach’s stockholders generally, but in any event no later than the 15th day of the third month of the calendar year following the calendar year in which the dividend is declared by Approach; and (b) if and to the extent Approach shall effect a stock split, stock dividend or similar distribution with respect to the Common Stock, the number of Performance Units subject to this Award  shall be increased or decreased by a number equal to the number of shares of Common Stock that would be distributed in connection with such stock split, stock dividend or similar distribution with respect to the Underlying Shares if they were actual shares of Common Stock.      

5. Withholding Taxes .  

(a) Approach may from time to time require Participant to pay to Approach or the appropriate Affiliate, or make arrangements satisfactory to Approach or such Affiliate regarding payment of, the amount Approach deems necessary to satisfy any federal, state or local taxes of any kind required by law to be withheld with respect to the Performance Units.  Unless otherwise permitted by Approach, the amount of such taxes required by law to be withheld with respect to the settlement of Performance Units shall be satisfied by withholding the amount of cash necessary to satisfy Approach’s obligation to withhold taxes from any cash payments to be made under Sections 3 or 4 .

(b) Any provision of this Agreement to the contrary notwithstanding, if Participant does not satisfy his or her obligations under Section 5(a) , Approach shall, to the extent permitted by law, have the right to

3

 

 


 

deduct from any payments made under the Plan, regardless of the form of such payment, or from any other compensation payable to Participant, whether or not pursuant to this Agreement or the Plan and regardless of the form of payment, any federal, state or local taxes of any kind required by law to be withheld with respect to the Performance Unit s.

6. Reclassification of Shares .  In the event of any reorganization, recapitalization, stock split, stock dividend, merger, consolidation, combination of shares or other change affecting the Common Stock, the Committee shall make adjustments in accordance with the Plan.  Any such adjustments made by the Committee shall be conclusive.

7. Effect on Employment .  Nothing contained in this Agreement shall confer upon Participant the right to continue in the employment of Approach or any Affiliate, or affect any right which Approach or any Affiliate may have to terminate the employment of Participant.  This shall not be construed as any agreement or understanding, express or implied, that Approach or any Affiliate will retain Participant as an employee for any period of time or at any particular rate of compensation or other terms and conditions of employment unrelated to Performance Units.

8. Assignment .  Approach may assign all or any portion of its rights and obligations under this Agreement.  The Award, the Performance Units and the rights and obligations of Participant under this Agreement may not be assigned, sold, transferred, pledged, exchanged, hypothecated or otherwise disposed of by Participant other than by will or the applicable laws of descent and distribution.

9. Binding Effect .  This Agreement shall be binding upon and inure to the benefit of (a) Approach and its successors and assigns, and (b) Participant and his or her heirs, devisees, executors, administrators and personal representatives.

10. Notices .  All notices between the parties hereto shall be in writing and given in the manner provided in Section 15.7 of the Plan.  Notices to Participant shall be given to Participant’s address as contained in Approach’s records.  Notices to Approach shall be addressed to the Corporate Secretary at the principal executive offices of Approach as set forth in Section 15.7 of the Plan.

11. Governing Law; Exclusive Forum; Consent to Jurisdiction .  This Agreement shall be governed by the laws of the State of Delaware except for its laws with respect to conflict of laws.  The exclusive forum for any lawsuit arising from or related to this Agreement shall be a state or federal court in Tarrant County, Texas.  This provision does not prevent Approach from removing to an appropriate federal court any action brought in state court.  NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS PROHIBITING REMOVAL TO FEDERAL COURT BY APPROACH OF ANY ACTION BROUGHT AGAINST IT BY PARTICIPANT.

12. Execution of Receipts and Releases .  Any payment to Participant or Participant’s legal representative, heir, legatee or distributee, in accordance with the provisions of this Agreement, shall be in full satisfaction of all claims of such persons hereunder related to the Award.  Approach may require Participant or Participant’s legal representative, heir, legatee or distributee, as a condition precedent to such payment, to execute such a release and receipt therefore in such form as Approach may determine.

13. Severability .  If any provision of this Agreement is held to be illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining provisions hereof, but such provision shall be fully severable and this Agreement shall be construed and enforced as if the illegal or invalid provision had never been included herein.

14. Headings .  The titles and headings of Sections are included for convenience of reference only and are not to be considered in construction of the provisions hereof.

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15. Amendment .  The Committee may amend the terms of this Award and this Agreement at any time, although no such amendment shall adversely affect, in any material way, the Participant’s (or a Participant’s Permitted Transferee’s) rights under an outstanding Award without the prior consent of the Participant (or the Participant’s Permitted Transferee) then holding the Award .  The Committee may amend the terms of this Award and this Agreement at any time following the Grant Date to provide for the settlement of vested Performance Units in the form of shares of Common Stock instead of (or in combination with) cash and, for purposes of clarity, any such amendment will be deemed not to adversely affect the Participant’s ( or a Participant’s Permitted Transferee’s) rights in any material way and therefore may be made without Participant’s ( or a Participant’s Permitted Transferee’s) prior consent .

16. Entire Agreement .  This Agreement constitutes the entire agreement between the parties concerning its subject matter and supersedes all prior agreements, understandings, and statements, both written and oral, between the parties with respect to such subject matter.  In signing this Agreement, the Participant is not relying on any written or oral statement, promise, or representation from Approach or its Affiliates concerning this Agreement other than as set above in this Agreement.

17. Section 409A Compliance .  The parties hereto intend that any amounts payable hereunder comply with or, to the maximum extent possible, are exempt from Section 409A of the Code and the applicable Treasury regulations and administrative guidance issued thereunder (collectively, “ Section 409A ”), and this Agreement shall be construed and administered in accordance with such intent.  Neither this Section 17 nor any other provision of the Agreement or the Plan, however, is or contains a representation to the Participant regarding the tax consequences of the grant, vesting, or settlement of the Performance Units granted hereunder, and should not be interpreted as such.  In no event shall Approach be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Participant on account of non-compliance with Section 409A.  Approach and the Participant agree to negotiate in good faith to make such amendments to the Agreement as the parties mutually agree are necessary or desirable to avoid the imposition of taxes, penalties or interest under Section 409A.  For purposes of Section 409A, each of the payments that may be made under this Agreement shall be deemed to be a separate payment for purposes of Section 409A.  Any payments to be made under this Agreement upon a termination of Participant’s employment or service shall only be made if such termination of employment constitutes a “separation from service” under Section 409A.  The applicable provisions of Section 409A are hereby incorporated by reference and shall control over any Plan or Award Agreement provision in conflict therewith.

 

18. Miscellaneous . Notwithstanding anything to the contrary in this Agreement, Approach will not be required to comply with any term, covenant or condition of this Agreement if and to the extent prohibited by applicable law. Participant shall reimburse Approach for incentive-based or equity-based compensation and profits realized from the Award covered by this Agreement as required by applicable law, including, but not limited to, Section 304 of the Sarbanes-Oxley Act of 2002 and Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, and agrees that Approach need not comply with any term, covenant or condition of this Agreement to the extent that doing so would require that Participant reimburse Approach for such amounts pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 and/or Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

 


5

 

 


 

IN WITNESS WHEREOF, Approach and Participant have executed this Agreement as of the date first written above.

 

Approach Resources Inc.

 

 

 

By:

 

 

Name:

 

[__]

Title:

 

[__]

 

 

 

PARTICIPANT

 

 

 

By:

 

 

Name:

 

[__]

 

 

 

6

 

 


 

APPENDIX A

TO 20[__] CASH-SETTLED PERFORMANCE SHARE UNIT AWARD AGREEMENT

 

Performance Goal for Performance Vesting Requirement

 

The Performance Goal for the Performance Units shall be comprised of the company performance goal set forth in Section 1 of this Appendix A .  The Performance Goal must be met or exceeded for the Performance Vesting Requirement for the Performance Units to be satisfied.  The Committee shall have the sole discretion for determining whether the Performance Vesting Requirement has been satisfied and any such determination shall be conclusive.  

 

1.

Performance Goal .  The following Performance Goal shall apply with respect to the Performance Units and relate to the calendar year ending [__], 20[_] (the “ 20[__]calendar year ”):

[“Performance Goal” to be based on “finding and development cost per unit” (as described in the Plan) in the form of cash operating expenses per Boe.]

 

 

 

Exhibit 31.1

Certification

I, J. Ross Craft, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Approach Resources Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:

May 3, 2018

 

/s/ J. Ross Craft

 

 

J. Ross Craft

 

 

Chairman of the Board and Chief Executive Officer

 

 

(Principal Executive Officer)

 

Exhibit 31.2

Certification

I, Sergei Krylov, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Approach Resources Inc.;

 

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.

The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:

May 3, 2018

 

/s/ Sergei Krylov

 

 

Sergei Krylov

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)

 

Exhibit 32.1

Certification of Chief Executive Officer of Approach Resources Inc.

(Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Approach Resources Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, J. Ross Craft, Chairman of the Board and Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

APPROACH RESOURCES INC.

 

 

 

 

Date:

May 3, 2018

 

/s/ J. Ross Craft

 

 

J. Ross Craft

 

 

Chairman of the Board and Chief Executive Officer

 

 

(Principal Executive Officer)

 

Exhibit 32.2

Certification of Chief Financial Officer of Approach Resources Inc.

(Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002)

In connection with the Quarterly Report of Approach Resources Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sergei Krylov, Executive Vice President and Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

 

 

 

APPROACH RESOURCES INC.

 

 

 

 

Date:

May 3, 2018

 

/s/ Sergei Krylov

 

 

Sergei Krylov

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial Officer)